Introduction

Alex Rodriguez is a 32 year old Miami native, and, having entered the workforce directly out of high school, currently holds down a job in New York City. Normally, at least for those entering the workforce right out of high school, attaining a good career is rather difficult. This is especially true considering that more and more employers are requiring prospective employees to attain at least a bachelor’s degree just to get into an interview room. However, Rodriguez, since the age of 18, has lived a rather comfortable lifestyle--- he never has had to worry about where is next meal is coming from, where to find shelter for himself and his family, nor has he had to rely on his monthly paycheck to sustain his family. What makes these facts even more interesting is Rodriguez’ work schedule--- he works only 7 months per year. This is because, in 2000, at the tender young age of 25, he signed a contract with his employer for 10 years and 252 million dollars--- all guaranteed salary. What is Mr. Rodriguez’ profession? He plays 3rd base for the New York Yankees. Rodriguez, all in the time it took to sign his name on a contract, quickly became the main scapegoat for a widely growing resentment in American society. This resentment is of the professional athlete. Not the athlete, so much as the salary the athlete earns for participating in an activity that is typically ascribed to the behavior 10 year old child. Are athletes overpaid? Or are their salaries justified? To progress to any understanding on this issue, four key questions must be answered:

What does the term “worth” mean, in the context of professional sports?

Who ascribes this “worth”, and why do they pay athletes such a high salary?

What is the difference, in terms of productivity, between the athlete and those with regular professional jobs?

What is the correlation between specialization and salary, in terms of the laborer?

This review will examine the various social and economic debates concerning the salaries of professional athletes.

What are Athletes Worth?

In the context of analyzing this issue of whether athletes are worth what they are paid, there must be a clear definition of the term “worth”. What does worth mean? Is it value in the sense of their essentiality to human nature? Is it their value to a society? Or does how much one produce remain the determining factor of worth?

A common sentiment of the typical sports fan is that athletes are overpaid. That is to say, athletes are paid more than their relative “worth”--- as opposed to teachers, lawyers, doctors, etc. For example, a USA Today article published in November 1994 cites a survey conducted on 2000 individuals on how adequately they feel athletes are paid. 87% of those surveyed responded that they feel athletes are overpaid, compared to nurses (10%) teachers (8%), and secretaries (2%). Sentiments have not changed much in the past 13 years. Judging from these statistics, one may infer that society views an occupation’s “worth” as its value to society. After all, nurses are essential components in American health care; teachers are essential to public education; while secretaries are crucial to various administrative tasks. Within this context of the definition, professional athletes seem to have little intrinsic value to society. They seem rather disposable. Take teachers away, and we have nobody left to teach the children. Take athletes out of the equation? We will simply have no games to watch.

This is the essential misunderstanding most people have about professional sports, according to Jimmie Lee Solomon, currently the director of Minor League operations for Major League Baseball. “Professional sports are a business. Our product just happens to be putting highly paid players on the field or court” (Corbett, 1995, p. 85) Therefore, Solomon says, we must not judge athletes based on their intrinsic value to a society; rather, we must judge them as products that create revenue. When the product happens to be a human, such as is the case with athletes, actors, musicians, or writers, that human must be compensated. Economics professor William L. Anderson expounds on Solomon’s point in an article entitled, “In Praise of Athlete’s High Salaries”. Citing the Statistical Abstracts of the United States (1996), he points out that Americans spent close to 13.1 billion dollars in 1995 on commercial sports. That number has grown even more significant in recent years. Clearly, Anderson points out, professional sports is a very lucrative business. These sports create significant revenue from the fans that pay to see them. Naturally, he concludes, an athlete’s worth should not be examined based on intrinsic value, but rather monetary value. How much money does the athlete create?

Who Ascribes this Worth?

Solomon and Anderson thus conclude that fans cannot be the people who ascribe worth to professional athletes. After all, an athlete’s only concern is whether his employer thinks he is worth a high salary, not the fans. True, higher fan consumption means higher revenue which means more worth, but fans are not the people who write the checks. This responsibility falls on the owners of these professional teams. Just as any CEO of a Fortune 500 company, it is the owner of the professional sports franchise that has the most at stake when examining whether an athlete is worth the investment. Therefore, he must examine this investment carefully; for if he doesn’t, his company will lose money and he will go out of business.

How does the franchise owner examine a player’s worth? In an interesting study entitled, “The NBA and the Influx of International Basketball Players”, economists Erik Eschker, Stephen Perez, and Mark Siegler examine the process by which an owner, or whoever within the organization has the responsibility of evaluating talent, determines a player’s worth on the market. They use the structure of the National Basketball Association as an example. As long as teams are able to buy or sell players, they say, NBA salaries will resemble an auction- like process (p.1010)

The authors point out that the bids from the teams are determined upon a given player’s Marginal Revenue Product (MRP). The team looks at performance and other factors like age, experience, height, etc. in order to gauge what the player’s market price is. In this environment, we should expect to see the player to be paid close to the highest expected MRP (p. 1011). This judgment is based on limited information and uncertainty, however, so bids are actually more likely to be far above or far below the actual MRP. Thus we find that the bid that is far above the actual MRP wins the player, and we find the case of a player being paid far more than he is really “worth” (p. 1012). This seems to suggest that, while some athletes may in fact be overpaid, it is in relation to other athletes, rather than to the rest of society. This explanation however, while partly justifying “how” athletes are paid so much, does not entirely explain “why”. Why don’t the all the owners get together and decide upon a system of worth such that overbidding doesn’t become a necessity? This is the type of question that would be raised by Adam Smith, the widely renowned “Father of Economics” and author of Wealth of Nations. There are fewer owners than there are players. Thus, they are more easily able to gather together and force the players to comply with a restructured pay system. The owners will always be able to hold out longer; they have more spare capital at their disposal. Why don’t they use this leverage? This failure has not been for a lack of trying. Collusion, as it is so called, was prevalent in Major League baseball in the mid 1980’s. As such, a rule was negotiated in the Collective Bargaining agreement prohibiting such action, whether on the part of the owners or the players.

What Do Athletes Produce?

It is quite safe to say that the salaries of various professional athletes are directly proportional to the revenue earned by their respective franchises. Tom Hicks, the owner of the Texas Rangers, was the man responsible for rewarding Rodriguez with the most significant contract in the history of professional sports. Twenty-five million dollars wasn’t merely an arbitrary number, however; Hicks, like other franchise owners in the MLB and other professional sports, had to estimate Rodriguez’ worth in terms of extra revenue he created.

Here we come back to the MRP figure, which Eschker, Perez, and Siegler explain more in depth. In essence, this figure calculates the change in total revenue from the franchise when employing one more unit of labor (p. 1011) --- in Hicks’ case, this unit of labor comes in the form of Alex Rodriguez. Furthermore, the cost of employing Rodriguez, according to this theory, must not exceed the extra revenue he generates for the Rangers. Hick expects Rodriguez, with his vast array of skills (hitting for power and average, superior baserunning, defense) to help the Rangers win more games. If the Rangers win more games, fans will buy more tickets and more memorabilia, networks will pay more to broadcast their games, and the team will generate more revenue. If this revenue is less than the 25 million dollars it costs to employ Rodriguez, then the investment is seen as a failure. However, if the revenue exceeds the costs, then Rodriguez’ salary is justified.

The idea that an athlete’s high salary can be “justified” is indeed absurd for some. Take for example an excerpt from this editorial in a July 2002 issue of USA Today:

“Some sense of sanity has to return to the salary structure of professional sports. It's absurd that a ballplayer makes millions of dollars while research analysts at places such as the Centers for Disease Control and Prevention get peanuts by comparison for doing work that saves lives. And look at what a small salary a schoolteacher makes.”

This is a thinly veiled adaptation of what Smith referred to as the “diamond-water paradox”. Water, which is essential to our existence, is worth far less to us than a diamond, which is of relatively little ultimate significance. Why, then, is the diamond worth more on the market than water? Anderson, referencing this paradox in his article, explains that the diamond is worth more than the water because water is far more abundant than diamonds. Because diamonds are relatively rare, the demand for them is high, and thus the price is highly elevated. Water, on the other hand, is relatively abundant; thus the demand is low and the price is low. It’s the basic economic theory of supply and demand. Professional athletes, far less abundant than teachers or research analysts, are worth far more on the open market. How many people out there can reproduce the unique skill set Alex Rodriguez has? Or Shaquille O’Neal? Or Peyton Manning? In contrast, how many people are there who can reproduce the skill set of a research analyst, or a teacher? Economist Sherwin Rosen will explain this dichotomy further in-depth.

How does Specialization Lend to Salary?

The interesting phenomenon of the athletes’ salaries, explained by Rosen in his article, “The Economics of Superstars”, makes the reward structure in sports differ from those in other professions. The business of sports, unlike other professions, lends itself to a more significant inequality with regards to distribution of incomes (p.449). Moreover, Rosen finds that this reward structure is highly non-linear--- the salaries of athletes rise in great disproportion to natural ability (p.451). For example, if we compare the skill set of Alex Rodriguez, against, say, his teammate Derek Jeter, we find that although their traits might be somewhat different in terms of specificity, they as players more or less have the same impact on the team. The disparity in statistics such as home runs, runs batted in, stolen bases, errors, etc. while noticeable to the ardent baseball fan, aren’t that great between the two. Yet Jeter, on average, earns 5 million dollars less than Rodriguez on an annual basis. Furthermore, when we compare the salaries of Jeter and Rodriguez to a player making the league minimum ($327,000 as of 2007), we may find a great disparity in statistics, but not so much in terms of overall skill level. Why, then, does Rodriguez earn ¼ more salary than Jeter, and over 75 times the salary of a player making the league minimum? And why don’t we find this salary structure in other professions?

The seemingly disproportionate salary structure in sports, according to Stefan Szymanski, is not the result of conscious mechanism design, but of intense competition. Professional sports is the prime example of what Szymanski calls the “tournament theory”; even though the difference in ability may seem small, winning is the vehicle that drives salaries (p. 469). Fans are much more inclined to pay to see the absolute best players in their respective sports; not the second-tier players. Though the difference in ability may be small, winning creates a vast separation between the best and the second best. Thus, we find that relative ability, rather than absolute ability, is of supreme importance.

This is not the case so much in terms of a teacher or a research analyst, or an electrician. Rosen indicates that some tasks have become so routine, so circumscribed, that any competent person will achieve the same outcome (p.455). As such, it is much easier for one to attain the skill set necessary for such a task. For example, there is not much difference in terms of outcome when the best electrician wires a house as opposed to the second-best electrician, or even the worst electrician. (There is a widely quoted joke in the medical business: What do you call the guy who finished last in his class at medical school? Doctor.) This is not the case is sports. The outcomes are more disparate. Because winning is at a premium, owners will go out of their way to find the superior talent, however small the difference in ability may be. According to Rosen, sports are such that poor talent is an inadequate substitution for superior talent (p.454). In other words, athletes are far more specialized than their counterparts in other areas of professional labor--- increased specialization leads to increasing disparities in relative income. Rodriguez, however small the difference in ability between he and Jeter, is worth 150% Jeter’s salary because his slightly superior talent is more likely to win games and create revenue.

Conclusion

The economics of the market for professional athletes are a conundrum that owners of professional sports franchises face every day. If Tom Hicks is faced with signing one of two players (in 2000 the players in question were Rodriguez and outfielder Manny Ramirez), he has questions to ponder. Which player has the superior talent? Which player is more likely to help the team win games? Which player is more likely to draw fans into the ballpark and sell jerseys? (Ramirez eventually signed with the Boston Red Sox for 8 years and 160 million dollars). In the arena of professional sports, such difficulty in assessing small differences in ability can often seem overwhelming, and might lead to panic on the part of the owners (Eschker, Perez, Siegler, 2004, p. 1010). This panic, stemming from the perpetual uncertainty of talent assessment, may greatly exaggerate an athletes’ worth on the open market, or, less often, even undervalue his worth. Whatever the case may be, most every economist agrees that the common man’s animosity towards athletes’ salaries most likely stems from jealousy and envy rather than economic theory.