With the 1998 Pele Law eliminating transfer fees for players whose contracts have expired, Brazilian football provides an ideal environment to test the impact of non-competition agreements on wages. This analysis reveals that older players benefit the most, while the wages of younger players have declined, which has broader implications for policies regarding the use of non-competitors among low- and high-income employees. Bernardo GuimarãesAnd the Joao Paulo PessoaAnd the And the Vladimir Punchik (All São Paulo School of Economics – FGV).
Non-competitive agreements, which temporarily prevent employees from entering into competition with their current employer once they leave, make it impossible—or at least very expensive—for many employees to accept job offers in similar fields, companies, or markets. It is estimated that 18% of all American workers are currently bound by noncompetitive agreements. This figure rises to 39% for professional degree holders and to 46% for those earning more than $150,000 annually.
This massive proliferation has recently seen non-competitive agreements become an important political issue. Towards the end of 2020, for example, the UK government launched a public consultation on Possible ban on non-competing items.
The effects of non-competing items are theoretically mixed. On the one hand, they may be useful for strategic reasons, such as protecting trade secrets. On the other hand, it may adversely affect wages. Moreover, by imposing costs on labor mobility, non-competitive agreements can impede effective matching of employers and employees. But how important are these effects? Surprisingly, football may provide a good answer.
How do the reasons for not competing relate to Brazilian and world football?
In general, the job market for football players includes transfer fees. In August 2020, for example, Lionel Messi announced his intention to leave FC Barcelona. But with his contract due to expire in 2021, the rival club had to pay a £630m fine to sign Messi. With no club willing to pay such an astronomical sum, Messi decided to stay for another year and (probably) leave Barcelona for nothing at the end of his contract.
Although now a common feature on the market for professional footballers, moving around freely at the end of the decade wasn’t always an option. Until 1995, clubs in the European Union could claim a transfer fee even after the contract had expired. It was only when he was a Belgian midfielder Jean-Marc Boseman has successfully challenged the legality of this situation through the European Court of Justice That football changed forever.
Meanwhile, the legal arrangements between players and clubs in Brazil remained the same as in Europe before Bosman’s rule. This changed in 1998 with the Pele Law, named after the great Brazilian player and then Sports Minister who pioneered in light of the no-competition ban campaign. After the new law goes into effect, teams can still include clauses demanding player transfer fees, but only for the duration of their contracts.
How do non-competing agreements affect labor markets?
in Recent Discussion PaperIn Brazil, we explore this policy change to examine how non-competitive agreements affect wages and efficiency in the labor market. Brazilian football provides a particularly apt context for studying how non-competitive agreements affect wages and efficiency for several main reasons. First, because the end of the non-competing clauses was an external change in policy. And secondly, because the new law had an important impact on the labor market for first-class professional footballers, but almost no effect on the economy as a whole. With so few career transitions between football and other professions, labor market policies and economic shocks affecting other sectors are not a major concern.
The figure below shows how the new law has affected the wages of Brazilian footballers. It shows the estimated relationship between wages and age in the two years immediately before and after Pele’s law, controlling for player fixed effects. The shaded areas are the 95% confidence intervals. We can see lifetime earnings of players increase in the years since the introduction of the new law, but the shape of lifetime earnings has changed. 28-year-old players were the highest earners, but the wages of young players fell.
Understanding wage changes after Pele’s law
What is the reason for this change in the lifetime earnings profile? It could have a distributive effect: the law could have increased the players’ bargaining power. Alternatively, it could have an effective effect: by removing barriers to transfers, it could have improved player allocation to clubs – for example, making it easier for clubs to assign the right players to the team. Both mechanisms can play a role, but what makes the difference?
In order to separate the distributional and efficiency effects, we propose an economic model and use a rich data set to explore the effects of Pele’s law. The model captures the main elements of the rich contractual environment of the labor markets for professional athletes and some other high-paying professions: long-term contracts, transfer fees, uncertainty about players’ performance, and auctions to sign players when contracts expire. The auction requires payment of a fee to the owner club when non-competing items are in effect, while no fee is required when there are no competitions.
We estimate the model parameters to match the wage and turnover profile from the post-Pelé law period. We then show that introducing non-competitive clauses into employment contracts in the model changes pay just as in the data: the player’s lifetime income declines with non-competitive frictions, but the salary of young players rises.
From the model, we can be sure of the quality of matches between players and clubs, whether with or without non-competition agreements. We found that the average match quality rises slightly with Pele’s law. However, this effect is very small and accounts for less than 1% of the increase in lifetime income for players.
Distributional effect of non-competing agreements
In general, the negative impact of non-compete agreements on match efficiency is positive but very small. However, the distributional effect is quite large.
The main driver of the effects on wages is the auction between clubs after the expiration of the agreement. In the case of non-compete agreements, the current club receives a fee if it loses the auction, paid by the winning club. Thus, both clubs have incentives to offer lower offers for the player. This significantly reduces the players’ wages. This channel is likely to operate elsewhere, although further research is needed to assess the external validity of our findings.
With the above warning in mind, the paper has implications for political debate. For low-wage workers, the effects on wages are very significant. For high-wage workers, distribution concerns are less important, and efficiency issues are important. In particular, matching efficiency is a major consideration. Hence, the paper provides support for the restrictions on non-competitors for low-income workers but not for high-paid employees.
This article was originally published by LSE Center for Latin America and the Caribbean
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