Premier League: higher wages = higher league position

Looking at the Deloitte analysis of “Annual Review of Football Finance 2022” the correlation between wage costs and league position is still very strong. Overall wage costs actually increased by 5% to £3.5 billion in 2020/21 eventhough clubs had agreed to wage cuts with the impact of COVID-19. However with revenue outstripping the growth in wages, the division’s wages/revenue ratio has reduced from 73% in 2019/20 to 71% in 2020/21.

Notable points from the graph are:

• Big 6 clubs (Manchester City, Manchester Utd, Liverpool, Tottenham Hotspur, Arsenal and Chelsea) increased wages by 7%.
• Manchester City has the biggest wage bill and revenue level.
• Leicester were the biggest spenders outside the top 6
• Fulham (relegated) and Crystal Palace had the highest wages/revenue ratio at 98% & 95%.
• Sheffield Utd and Tottenham Hotspur had the lowest wages/revenue ratio at 49% & 57%
• Both Sheffield Utd and West Bromwich Albion were relegated and spent the lowest on wages – £57m and £77m. Burnley was the next lowest at £86m but managed to avoid relegation by finishing 17th.
• The big six accounted for 51% of EPL wage costs.
• The wage gap between 6th place (Tottenham Hotspur) and 7th place (Leicester City) was £13m.
• *Spearman’s correlation coefficient increased from 0.66 in 2019/20 to 0.87 in 2020/21 – means a stronger correlation between wages and league position.

*Spearman’s rank correlation measures the strength and direction of association between two ranked variables.

Source:

Deloitte “Annual Review of Football Finance 2022”

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Wages in the English Premier League – Demand-Pull Inflation

You are no doubt are well aware of the staggering wages that the English Premier League player receive especially when you consider other occupations.

What ultimately the salary explosion has been driven by the huge amounts of money that is now at the disposable of some of the top clubs. In economics this refers to the concept of demand-pull inflation where the supply has not kept apace with the demand for world-class players. Below is graph showing both demand-pull and cost-push.

What are the highest paid sports leagues?

NBA basketball has the highest average salary of any sports league followed by IPL cricket with baseball coming in third. Over half of the highest paid leagues were football with the EPL and the Bundesliga being above US$2 million. It is interesting that La Liga is third within the Football category even though a Spanish team has won the Champions League 5 times in the last 7 years.

In cricket the Twenty20 format has proved to be very popular with television viewers and gets very good attendances most notably in the IPL (India), Big Bash (Australia) and T20 Blast (England). In September this year IPL signed a five year contract worth US$2.55bn (US$510m per year) for broadcast and digital rights with Star India – a TV network owned by 21st Century Fox. The IPL competition involves just 60 matches which equates to US$8.5m per game which is 400% higher than the NBA per game and 66% greater per game than that of the EPL.

Cricket in the USA
Although cricket is globally very popular it has very limited uptake in the USA – both players and spectators. Sport in the USA has a high income elasticity of demand which means a change in income results in a greater percentage increase in demand. An Indian Media firm – Times of India Group – are hoping to tap into the American market and put on high profile cricket matches with the leading players in the game. The games generally take place in baseball stadiums but the firm is considering building cricket stadiums.

Highest paid sports leagues 2014-2015 season.

Source: CIE AS & A Level Revision Guide by Susan Grant

What are the highest paid sports leagues?

NBA basketball has the highest average salary of any sports league followed by IPL cricket with baseball coming in third. Over half of the highest paid leagues were football with the EPL and the Bundesliga being above US$2 million. It is interesting that La Liga is third within the Football category even though a Spanish team has won the Champions League 5 times in the last 7 years.

In cricket the Twenty20 format has proved to be very popular with television viewers and gets very good attendances most notably in the IPL (India), Big Bash (Australia) and T20 Blast (England). In September this year IPL signed a five year contract worth US$2.55bn (US$510m per year) for broadcast and digital rights with Star India – a TV network owned by 21st Century Fox. The IPL competition involves just 60 matches which equates to US$8.5m per game which is 400% higher than the NBA per game and 66% greater per game than that of the EPL.

Cricket in the USA
Although cricket is globally very popular it has very limited uptake in the USA – both players and spectators. Sport in the USA has a high income elasticity of demand which means a change in income results in a greater percentage increase in demand. An Indian Media firm – Times of India Group – are hoping to tap into the American market and put on high profile cricket matches with the leading players in the game. The games generally take place in baseball stadiums but the firm is considering building cricket stadiums.

Highest paid sports leagues 2014-2015 season.

Source: CIE AS & A Level Revision Guide by Susan Grant

Why Neymar’s transfer fee could make economic sense.

Late August is often a very busy time for football clubs as the transfer window closes and this year was no exception with Neymar da Silva Santos Junior being signed by French club Paris Saint-Germain (PSG) from Barcelona for a staggering €222m. How can a club afford a record signing – more than double the previous record price for a footballer? To put this is perspective Paris Saint-Germain is owned by Oryx Qatar Sports Investment, a privately held company based in Doha, which is in fact an investment vehicle for the Qatar government. Neymar will cost PSG’s owners about €500m over five years but he is an investment which the club hope to take advantage of.

From PSG’s perspective, the price tag requires close scrutiny. Although transfer fees have generally increased with the sport’s revenues over time, their share of clubs’ overall spending has remained more or less steady: big clubs are reluctant to surrender more than a quarter of their annual revenue on a single player. Just four of the 19 European transfers so far to have cost €60m or more have exceeded this threshold. Neymar’s deal blows through it: he is likely to cost PSG around 40% of next year’s turnover (see chart below). No top team has spent such a large chunk of its income on a player since the signings of Mr Figo and Zinedine Zidane at the turn of the century. The only other player to command more than 25% of a club’s revenues was Radamel Falcao, who was bought shortly after AS Monaco won promotion from France’s second division, where broadcasting and sponsorship revenue are much lower.

So how will PSG recoup the cost of Neymar?

• Match day tickets and corporate hospitality sales.
• Broadcasting rights – domestic leagues, cups and Champions League.
• Commercial sources – playing kit merchandise – on the day the signing was announced fans queued up at the PSG merchandise shop and bought over 10,000 shirts at $118 each. Additional sponsorships and image rights given Neymar’s marketability. 59% of PSG’s revenue of €520m last year was commercial i.e. other than ticket sales and broadcasting fees.
• Instagram – Neymar has more followers on Instagram than Nike and this following will help PSG negotiate a deal greater than the current €24m it receives from Nike each year. Barcelona are to receive €155m from 2018 for wearing a Nike playing strip.
• Overseas supporters – Manchester Utd are the most popular team on Chinese social media although they haven’t qualified for the Champions League for the last couple of seasons. If Neymar can bring success to PSG maybe this will open the door to new and much bigger markets.

A good performance in the Champions League will no doubt lessen the burden on PSG – only time will tell. Their campaign starts on Tuesday with an away game at Celtic.

Source: The Economist – August 12th 2017

Football salaries – superstar and tournament effects.

Amongst the extensive coverage of the Olympic Games from Rio, the start of the Football season in Europe has slipped under the radar. Michael Cameron’s blog post on footballer salaries was timely and in particular his discussion around the difference between the superstar and tournament effects.

Superstar effects – this is where a player is rewarded with a higher salary than his/her team mates for generating higher revenues for their club.

Tournament effects – this is the situation where wage differences are based NOT on marginal productivity but instead upon relative differences between the individuals. Ultimately each player only needs to be a little bit better than the second best player in order to ‘win’ the tournament.

Michael Cameron looks at the salaries of Ronaldo and Messi and states that it is unlikely that either of these players would generate more than twice as much value as the others on the graph below. Therefore the difference in salaries must be generated by something other than just superstar effects; that is, tournament effects.

In contrast, the difference in average salaries in England between Premier League footballers (£1.7 million) and League Two footballers (£40,350) is likely to be a mix of superstar effects (Premier League footballers generate more value for their employers than League Two footballers) and tournament effects (there’s a limited number of places for Premier League footballers, so slightly worse players end up in lower divisions paying less). See graph below.

One last point: It’s been argued (I saw this argument first in Tim Harford’s book The Logic of Life) that the size of the ‘prize’ for a tournament will be larger the more luck is involved. That is, if the difference between the tournament ‘winner’ and the others is mostly luck, the size of the bonus for working hard to win the tournament must be high in order to sufficiently incentivise the worker to work hard. So, if you buy that the difference in the graph above is mostly a tournament effect, does that mean that the earnings difference between Ronaldo and Messi at the top, and Neymar in third, is mostly down to luck?

Source: Michael Cameron

Wages and performance in the English Premier League

With Leicester City being crowned as EPL champions it was only time before someone in the media produced data showing the correlation between a club’s wage bill and their final position in the EPL. What is so extraordinary about Leicester’s feat what that it wasn’t a one off victory in the FA Cup or something similar but a competition that involved 38 games in the season. With Leicester just surviving relegation last year the odds on them winning the EPL were 5,000 to 1. What is so unique about their feat is that since the 1995-96 season the champion side has spent 225% more on player salaries as the median team. Arsenal, Chelsea, Manchester Utd and Liverpool have paid the highest wages to its squad of players and finished in the top four positions in the EPL 80% of the time. The total cost of Leicester’s regular team (£25m, or $36m) this season was less than a quarter of what Manchester United spent on new players last summer. Furthermore, if you look at Leicester City’s wage bill this year it is 75% of the league median which makes them, after Newcastle Utd in 2001-02, to break into the top four with a below-median wage bill.

Temporary Situation

However, Leicester’s success means that affluent clubs will spend even more money on sports science, video analysis and get the best people to work in these departments. No doubt that this will move the transfer market towards ‘perfect competition’ as information will flow more easily and clubs will not be able to benefit like Leicester in picking up players whose value has been underpriced. Therefore an advantage by one club will lead to only a temporary advantage until other clubs catch up. Consequently things will return to normal as talent will be distributed to those who can pay the most.

Click here to go to The Economist website to access their interactive image.

Football League Position = Money Spent

The Economist had a great graphic which broadly stated that a club’s position in the English Football League is determined by how much money they spend on players. The link between the amount spent on wages and the number of points won is strong (see chart). Relative to the league median, 55% of the variation in the number of points scored in any given season can be explained by the amount spent on wages. To access the interactive graphic and see which clubs spend the most click – The booty-full game

However research that there are other variables that influence success.

1. Teams that perform better might reward players with higher salaries. Fatigue might be a factor: Liverpool may have done well in the league this season partly because it has not been competing in Europe.

2. Managers are also influential. Sir Alex Ferguson, who retired as manager of Manchester United last year after 26 years, won an average of 15 points more than might be expected given the amount the club spent on wages. Had he been just an average manager, he would have won just one Premier League championship in 17 seasons; instead he won 11. Some clubs, like Southampton, punch above their weights under different managers.

Spain hold onto Euro

Having arrived in Spain (Mallorca) last night just before the euro final I could not post something about football – the Spanish know how to celebrate. Spain showed their class and are an exceptional team to have won three major tournaments in the last four years. Some have likened them to the Brazil team of 1970.

In keeping with Spanish football, I came across Simon Kuper, co-author of Soccernomics, on the eZonomics website by ING. One particular part of the site focuses on soccer – Cup-o-nomics – in which current issues in the sport are related to economics. With the Euro 2012 Championship on he has written several articles about players. managers etc.

In July 2007, the Spanish striker Fernando Torres moved from Athletico Madrid to Liverpool. Torres commanded a salary of £90,000 (NZ$175,500) a week at Liverpool, equivalent to £4.6m (NZ$9.1m) a year. Interestingly enough this was a salary cut as at Athletico he was on an annual salary of €8 million (about NZ$10.5 million). However within a year of signing for Liverpool the purchasing power of his income decreased for the following reasons:

1. The pound depreciated against the euro (hard to believe now) by around 20%. Most foreign players tend to send home a lot of their salary and therefore Torres needed to use more pounds to buy euros.
2. After 2008 and the financial crisis the UK experienced over 5% inflation which again would have lessened the purchasing poser of his income. Most soccer players are on a given salary for the duration of their contract and therefore don’t have their income indexed to the CPI or cost of living.

Even all this said, Fernando Torres is probably not too worried about exchange rate fluctuations or inflation rates when you look at his salary and the season he has just had with Chelsea and Spain.