As Premier League clubs recover from the financial hit of Covid-19, they will again become active in the global labour market for footballers. But their player development and recruitment strategies are likely to change as a result of the UK leaving the European Union.
Football at the highest level is a lucrative business. In 2018/19, the last full season unaffected by Covid-19, the ‘Big Five’ – the top-tier leagues in England, France, Germany, Italy and Spain – grossed €17 billion in revenue (Deloitte Sports Business Group, 2020).
The 20 clubs in the English Premier League had combined revenues of €5.9 billion in 2018/19, well ahead of the next biggest football league – the Spanish La Liga, with gross revenues of €3.8 billion. That year, eight Premier League clubs appeared in the list of the 20 biggest football clubs in the world (as measured by revenue). Manchester United, the largest Premier League club with an annual revenue of €711.5 million, ranked third globally behind the two Spanish giants, Barcelona and Real Madrid (Deloitte Sports Business Group, 2021).
Like most UK business sectors, the Premier League has been apprehensive about the consequences of the country leaving the European Union (EU). This apprehension has mainly been focused on the ‘supply-side’ effects of Brexit on the labour market for players, rather than the ‘demand-side’ effects on club revenues. Rather than being worried about reduced demand from EU countries to buy the media rights for Premier League games, clubs are much more concerned with the possibility of new regulatory controls in the UK that may restrict their ability to bring in overseas players to join their squads.
The European market is a significant source of revenue for Premier League clubs, both from the sale of TV rights to broadcast Premier League games as well as the revenues received by competing in the lucrative European tournaments such as the UEFA (Union of European Football Associations) Champions League. But with UEFA, the governing body for European football, being domiciled outside the EU in Switzerland, Brexit is expected to have a minimal impact on this revenue source.
It is the effects of Brexit on the international mobility of labour – in this case, players – that is the greatest concern for the Premier League.
How are the wages of footballers and other elite athletes determined?
According to economic theory, competitive labour markets will result in workers’ wages being equal to the incremental increase in company revenue that they generate from being hired. This is known as the ‘marginal revenue product’ (or MRP), which is calculated by multiplying the value of what workers ‘make’ or ‘do’ (their ‘marginal physical product’, MPP) by the product price.
In the context of professional sport, the MPP of a player is their incremental contribution to team performance. The relevant price is the sensitivity of team revenues to team performance. In essence, a player who improves a team through their skillset will help that team to win more games, and winning generates both direct and indirect revenues for the club.
Using this economic theory to establish wages as being equal to MRP is a useful starting point for understanding the nature of the labour market for football players.
But three real-world complications distort this calculation. First, football clubs are not necessarily just aiming to maximise their profits, and may better be understood as trying to maximise sporting success as an objective in its own right (Sloane, 1971). In economic theory, they are better conceived of as ‘utility maximisers’ as opposed to ‘profit maximisers.’ If clubs value sporting glory over profit, the marginal value of players will exceed the increase in revenue that they generate for their club. Winning, while useful for increasing revenue, has value in itself.
Second, players create value not only through their on-field contribution to winning matches but also through their off-field image rights. This can increase a club’s merchandising and sponsorship revenues.
Finally, and of particular relevance in the context of Brexit, the theory of wages being equal to MRP requires a competitive labour market. But the history of players’ labour markets has been dominated by regulation and restrictive practices on the part of clubs and leagues.
Since their inception in the late 19th century, professional sports leagues have imposed controls on the labour market for elite players. These regulations have restricted the ability of players to achieve wage levels consistent with their MRP. In particular, leagues have tended to impose player reservation systems, giving teams the right to retain players at the end of their contracts provided the terms of the contract are at least as good as the previous contract.
Economists estimated that baseball players in the late 1960s were receiving only 15-20% of their MRP because of the so-called ‘reserve clause’, which reserved exclusive bargaining rights for a player’s services to their current team (Scully, 1974).
In football, a ‘retain-and-transfer’ system emerged. To be eligible to play in a league, players had to be registered. This registration became an asset in its own right since clubs held the registrations of their players and could demand a transfer fee for the registration should a player move to another club, even if the player was out-of-contract.
How did the ‘Bosman ruling’ affect the economics of professional football?
When the Premier League was formed in 1992, the labour market for football players was largely divided by national boundaries. Very few British players played in overseas leagues, and very few foreign players played in the UK. This was reinforced by UEFA, which limited the number of foreign players that clubs could field in their tournaments, justifying this restriction by the need to protect the incentives for clubs to invest in youth development.
By the early 1990s, the retain-and-transfer system had been reformed to some degree under pressure from both players’ associations and the courts. ‘Freedom of contract’ was introduced in British football in 1977, giving the right of out-of-contract players to move to other clubs but with a transfer fee still payable and provision for arbitration if clubs could not agree on the transfer fee.
But elsewhere in the EU, the reform of football’s transfer system was much more limited. In Belgium, the retain-and-transfer system remained intact. This was the case until it was challenged by a Belgian player called Jean-Marc Bosman, who had been denied a transfer to a French club.
Bosman took his case to the European Court of Justice claiming that football was in breach of the Treaty of Rome (the foundational document of the EU) by limiting the free mobility of players. The European Court of Justice agreed, handing down what became known as the ‘Bosman ruling’ in September 1995. This ended the payment of transfer fees for out-of-contract players – unless these fees represented compensation for the development costs of young players – as well as abolishing restrictions on the number of foreign players.
The Bosman ruling transformed the labour market for professional players within the EU. A globally competitive labour market for players began to emerge just as Premier League revenues started to grow exponentially. Free mobility of labour allowed Premier League clubs to offer the best wages to attract the best foreign players, and the removal of the payment of transfer fees for out-of-contract players increased the bargaining power of players, so that they were able to obtain a greater share of their MRP.
The increased bargaining power of players led to a rapid rise in the wage-revenue ratio, which measures the proportion of club revenues being spent on wages. There is a very evident Bosman effect on the wage-revenue ratio in the Premier League between 1997 and 2002 (see Figure 1). During this five-year period, the wage-revenue ratio rose from 47.0% to 62.4% – with average annual revenue growth of 19.5%, but average annual wage growth of 26.5%. Thereafter, revenues and wage costs have grown at similar rates, averaging just over 9% annually.
Figure 1: Wage-revenue ratio, top division, England, 1991/92 to 2018/19
Source: Deloitte Annual Review of Football Finance (various editions); author’s own calculations
Brexit: a reversal of the Bosman ruling?
Brexit has ended the free movement of labour between the UK and the EU. To this extent, it represents a reversal of the Bosman ruling. Clubs wishing to sign foreign players must now apply for a work permit, irrespective of whether these players are moving from EU or non-EU clubs. Work permits are awarded on a points-based system.
In the context of professional football, any player who has played in at least 70% of their national team games over the previous 12 months will be automatically awarded a work permit. This is, however, conditional on their national team being ranked in the top 50 worldwide, with the minimum appearance requirement falling to 30% if the national team ranks in the top ten. Points are also awarded for players based on appearance rates for their clubs in both domestic and continental tournaments as well as the success of their clubs.
In addition to this, Premier League clubs now face restrictions on the signing of young foreign players. Clubs are no longer able to sign any foreign players under the age of 18 and, in a given year, are limited to signing a maximum of six foreign players under the age of 21.
But in relation to the abolition of transfer fees for out-of-contract players, Brexit has had no direct impact. This aspect of the Bosman ruling is now well enshrined in the transfer rules of football’s national and international governing bodies, with no realistic prospect or incentive for Premier League clubs to seek to reverse the position.
Where next for professional football after Brexit?
The first post-Brexit transfer window saw unusually low levels of transfer spending by Premier League clubs. But this was almost certainly due to the loss of revenues caused by the Covid-19 pandemic. It is estimated that the Big Five leagues lost €1.9 billion (over 11%) of total revenue in 2019/20, largely because of the restrictions on spectators attending games (Deloitte Sports Business Group, 2021).
As we begin to return to a post-pandemic normality, revenues will recover and Premier League clubs will again become active in the global labour market for players. But their player development and recruitment strategies will change as a consequence of Brexit.
Clubs will be forced to focus exclusively on home-grown talent up to the age of 18 and they will no longer be able to recruit 16 and 17 year olds from the EU. They will also have to be more selective in the 18-21 age group. Further, Premier League clubs will find it much more difficult to take a chance on players from low-ranked nations.
There are, however, some opportunities. The new and much expanded points-based system will make it easier for British clubs to sign non-EU players who did not previously qualify for a work permit. A good example is Liverpool’s Nigerian player, Taiwo Awoniyi, whom the club first signed in 2015. Awoniyi has been on loan to a series of German teams over the last six years and is yet to play for Liverpool, having not qualified for a work permit. Under the new system, Awoniyi will now be eligible to play for Liverpool in the Premier League.
Where can I find out more?
- The Deloitte Sports Business Group produces two annual reports on the financial aspects of the football industry – the Annual Review of Football Finance; and the Football Money League:
- Home Truths, the 2020 Annual Review of Football Finance report, covers the leading European football leagues and provides the first estimates of the effects of Covid-19 on club revenues.
- Testing Times, the 2021 Football Money League report, focuses on the finances of the biggest clubs worldwide and includes updated estimates of the Covid-19 effects.
Who are experts on this question?
- Bill Gerrard
- Peter Sloane
- Stefan Szymanski
- James Reade
- Carl Singleton
- Peter Dolton