The Imperfection of Markets Part 1: Richard Dunne

I have regular arguments with my wife about football, or to be more precise, the 'market' for footballers and their resulting transfer fees and wages.

I argue that their wages are the result of a free market; it is no different from top City traders making millions, or indeed Lady Gaga or Celine Dion doing the same.  She argues that this must be a very imperfect market (if nothing else, made imperfect by the club owners' willingness to put in £ millions without the normal requirement of an economic return).  When the latest news of John Terry's weekly pay packet is reported she usually expresses it a bit more directly that that e.g. "how absolutely ridiculous!"

Well, I'm afraid I concede. She is right. And the straw that broke the camels back...this report in the Telegraph which is all about Martin O'Neill's shock departure from Aston Villa, but includes this:

"Most damagingly, the club's wage bill has risen by 42 per cent to £71 million (£11 million more than Tottenham and £21 million more than Everton) giving an alarming wages-to-turnover figure of 85 per cent – with the likes of Richard Dunne believed to be earning £70,000 a week".

That's Richard Dunne.  Big lad.  Puts himself about a bit.  Not particularly skillful, but..you know, tries hard. And that's £70K a week. Three times the national average annual wage - per week.

Something is wrong here.

Voices (5)

  1. bitter and twisted:

    Footballers wages are actually fairer and more reasonable than CEOs.

    A Footballer publicly performs x bits of skill in y matches every year.
    Which means hundreds of visible demonstrations of their relative ability.

    However, A CEO makes a handful of CEO level decisions a year and the outcome of those decisions is largely down to external factors. A dumb decision can pay off and the wise one fail miserable.

  2. Alex:

    Those are the points that are easily identifiable as all his own doing. Goal line clearances, and the like. There is also his role in helping prevent opposition strikers from making goal attempts in the first place, for example. The stats suggest this was also a valuable contribution: if you look at Villa’s 39 EPL goals conceded last season with Dunne on board, only three clubs (Liverpool, Man U and Chelsea) did better. Whereas the previous season, pre Dunne’s arrival, Villa let in 48 and had only the tenth best defensive record – even worse than Wigan.

    I’m not averse to performance related pay – but it has to be linked to metrics the employee has reasonable influence over. Dunne himself could have had a perfect season (ensuring Villa had a clean sheet in every game he played in) and that wouldn’t have significantly changed the £43million loss: not just because as a defender he doesn’t score goals, but because he doesn’t have power to determine new hires or fires, wages, sales and marketing strategy, operating costs, financing arrangements… I wouldn’t call him a senior executive for that reason. But I do think linking defenders’ pay to clean sheets or goals conceded wouldn’t be a bad development…

  3. admin:

    I’m not sure I buy the 10-12 points but even if I did, as you say that would be worth £1.6 million, not the £3.6 million (plus extras, NI etc etc) he was paid.

    And he was basically a ‘senior executive’ in a business that lost £43 million last year. Performance related pay, anybody?

  4. ron:

    Glen Johnson – highest paid player in the England World Cup squad!

  5. Alex:

    Awwww come on Peter, no Cambridge supervisor would accept THAT as a logical argument that the football transfer market doesn’t work! .

    At the time he left City, Dunne was a very senior player: captain of the club, had been voted Player of the Year five years in a row by the fans, and (it turned out) had been the only thing holding the team’s defences together. In his first year at Villa, he almost certainly earned at least 10-12 points (equivalent to two league places, or £1.6 million in EPL prize money alone) on his own with his miraculous clearances in front of goal, and played in almost every game. I’d value him well worth £70k a week, and probably more: – in light of details emerging about the Milner/Ireland transaction, we now know Dunne almost certainly took a pay cut to go to Villa.

    The argument that you say you want to make is that football transfer markets don’t work. I’d agree there are imperfections (which market is perfect?) but I think you’ve picked the wrong example.

    One of the imperfections is the lesser visibility/measurability of the contribution of individual defenders like Dunne in saving points than of strikers earning them. There’s the illiquidity introduced by 2-4 year contracts: although that’s increasingly becoming less of an issue. Then there’s the confusing transparency issue of the two elements to a player’s price: the transfer fee (including agents bungs and appearance bonuses) and the wages, which effectively add up to a total contractual cost to the club. You virtually NEVER see references to this cost in the papers: they’ll misleadingly only pick on one element to wave around.

    [Re these two elements: I’ve always wondered if there could be imperfection in the way wages are more driven by past form (while the transfer fee bit is mainly driven by future prospects). Claimed past form is obviously the no 1 driver in salary negotiations in every industry in the world, mainly because noone can think of a better way to do it. But when you value companies – which have widely publicised track records similiar to those of footballers – future prospects are far more important. Maybe this is because valuation of people rarely factors in externalities like macro factors and market trends, and their careers – particularly in the case of footballers – are shorter and more uncertain.]

    All this leads to situations where Dunne (who ended up playing every match and saving quite a few) gets £70k a week, and Heskey (who ended up starting one game all season and won nothing) gets £85k. Or where Dunne is transferred to Villa for £6m to earn £70k a week, and Milner is transferred to Villa for £12m and earns £45k a week.

    If you’ve read “Moneyball”, it’s easy to suppose that the UK football market is primitive compared to the science behind US baseball transfers. In “Why England Lose”, by Simon Kuiper and Stefan Szymanski there are some interesting arguments which suggest our market might be more efficient than we think. But nonetheless I gather that clubs in the EPL such as Arsenal are on the case to become the next Oakland A’s: it’s mainly a matter of gathering the data, which isn’t always (viz Dunne) as obvious as in baseball….

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