In this chapter, we examine how labor markets work in professional sports. The forces of labor supply and labor demand do a good job of explaining why the salaries of professional athletes have grown so much over the last several decades. Increasing demand by fans for a sport translates into higher demand for labor by teams. Athletes can increase their own earnings by investing in human capital. To the degree that the skills they acquire are general skills, athletes must pay for the training by accepting lower salaries.

The distribution of income in professional sports is highly skewed toward those with the most talent. Tournament organizers and teams provide disproportionate rewards to get players to provide more effort. Reward systems based on rank-order tournaments and superstar effects some dangers, as they can lead to poor teamwork, sabotaging one’s opponents, and carrying effort to unhealthy extremes. The unhealthy extremes include levels of practice that lead to permanent disability later in life or to the abuse of performance-enhancing drugs.