Do sports stars deserve their wages? Should their governing bodies introduce a wage cap?
By Hannah McCartney
First Year, First Prize
In recent years there has been much debate about wage levels in professional sport, leading
some governing bodies to introduce wage caps in order to control the ever increasing
salaries. Whether the sportsmen and -women are deserving of such high wages is a
contestable issue and one which this essay will look at from an economic perspective.
In terms of supply and demand, it is clear to see that sport stars’ wages will always be above
those of an average profession because of the restricted supply and inelastic demand.
Diagram 1, shown below, illustrates how the inelastic supply and demand of sports stars, as
well as the scarce supply of talent, leads to wages being significantly higher than a
profession with relatively elastic supply and demand and a much less scarce supply. In this
example, the supply and demand curves for teachers have been used.
Wages
Sports star supply
WS
Teachers supply
WT
Teachers demand
Sports star demand
ES
ET
Employment
Diagram 1 – relative supply and demand for sports stars and teachers [1]
However, the colossal wages seen in professional sport are rising exponentially year on year.
One explanation for this is that we are living in a “winner takes all” society. The value of
what gets produced in the market depends on the efforts of a relatively small number of top
performers in each sport. This is further heightened by the concept of cumulative
advantage: the “rich get richer”, or perhaps “the good get better”, effect. Those athletes
who are already playing at a high level will continue to receive the expert coaching and
experience that comes as part of the job and will continue to improve and therefore earn
more money. This has not only lead to growing income inequality between sport and other
professions but also, perhaps, a “misallocation” of talent: athletes who have not had the
opportunity to benefit from the high levels of coaching and experience may be just as
talented athletes as those who are earning the highest wages, but have not been discovered.
In this way, there is an opportunity cost associated with the sports stars’ wages in that the
money could be used to discover and train more talented athletes which could bring in
higher revenues for the market in the long run. In Kurt Vonnegut’s novel Bluebeard, the
author writes, “the entire planet can get along nicely now with maybe a dozen champion
performers in each area of human giftedness.”[2] This point of view emphasises the
superstar phenomenon that exists in certain industries, including professional sport. During
the 1931 season, New York Yankee player Babe Ruth was asked how he felt about earning
more than President Hoover (at the time Ruth was the highest paid player in baseball with a
salary of $85,000). Ruth responded that he deserved it: “I had a much better year than
Hoover,” [3] he explained. Sherwin Rosen’s report on the superstar phenomenon explains
that “human capital interacted with production technology magnifies small differences in
talent at the top of the distribution, which will translate into large differences in earnings” [4]
meaning there are a few, marginally more talented, performers earning disproportionately
higher salaries than the rest of the industry. This can be shown empirically by looking at the
earnings of the top sports stars in the world across all sports. Table 1, shown below, shows
the top 20 athletes. As the data shows, not only is there a large difference in earnings across
sports (top ranked sports star Tiger Woods earned over twice the amount that Peyton
Manning, at number 19=, earned in 2013) but also within the sports themselves (the top
ranking American football player, Drew Brees (number 5) earned $42m more than Peyton
Manning, the fifth highest earning American football player worldwide). These statistics
show that all sport industries are dominated by a few star players who earn considerably
more than the rest of the industry. This significant (and ever-expanding) inequality suggests
that the highest paid stars do not deserve such high wages. Karen Gill, honorary president of
Liverpool Football Club Supporters' Committee said of the disparity, “...it becomes a vicious
circle of increased wages. But it seems to have spiralled out of all proportion and seems
utterly absurd and ridiculous, especially when people working very, very hard can barely
scrape a living...especially over the last five to 10 years where it seems to have become
more and more ridiculous the amounts of money that people are willing to pay them.” [5]
Although some would argue that sports stars are only at the top of their game, and
therefore earning the highest incomes, for a relatively short amount of time, it cannot be
ignored that the platform professional sport gives them in terms of potential income for the
future is significant. For example, Gary Lineker is now worth a reported $35 million [6] – an
amount far exceeding that which he earned while playing professional football.
Table 1 – Top 20 sports star earnings in USD (2013) [7]
Rank
Name
Pay ($m)
Salary/Winnings
($m)
Endorsements
($m)
Total
($m)
Sport
1
Tiger Woods
$78.1
$13.1
$65.0
$156.2
Golf
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19=
=
Roger Federa
Kobe Bryant
LeBron James
Drew Brees
Aaron Rogers
Phil Mickelson
David Beckham
Christiano
Ronaldo
Lionel Messi
Manny
Pacquiao
Tom Brady
Derrick Rose
Joe Flacco
Floyd
Mayweather
Mahendra
Singh Dhoni
Kevin Durant
Alex Rodriguez
Fernando
Alonso
Peyton
Manning
$71.5
$61.9
$59.8
$51.0
$49.0
$48.7
$47.2
$6.5
$27.9
$17.8
$40.0
$43.0
$4.7
$5.2
$65.0
$34.0
$42.0
$11.0
$6.0
$44.0
$42.0
$143.0
$123.8
$119.6
$102.0
$98.0
$97.4
$94.4
Tennis
Basketball
Basketball
American Football
American Football
Golf
Football
$44.0
$41.3
$23.0
$20.3
$21.0
$21.0
$88.0
$82.6
Football
Football
$34.0
$38.3
$37.4
$36.8
$36.0
$31.3
$16.4
$35.9
$8.0
$7.0
$21.0
$0.9
$78.0
$76.6
$74.8
$73.6
Boxing
American Football
Basketball
American Football
$34.0
$34.0
$0.0
$68.0
Boxing
$31.5
$30.9
$30.3
$3.5
$16.9
$29.8
$28.0
$14.0
$0.5
$63.0
$61.8
$60.6
Cricket
Basketball
Baseball
$30.0
$28.0
$2.0
$60.0
Racing
$30.0
$18.0
$12.0
$60.0
American Football
However, how deserving a sports star is of their wages, from an economic point of view, is
dependent on how much their involvement in the sport directly translates into higher
revenue for their team (the marginal revenue product of labour). In an ideal world, each
worker’s wages would be exactly equal to their marginal revenue productivity, meaning
they earn exactly as much as they benefit the firm they are working for. According to
Hausman and Leonard, “the presence of star players can have a considerable effect on the
number of television viewers,” [8] meaning the extraordinarily high wages may be deserved.
In their study of the basketball industry, they found that star players such as Michael Jordan,
Magic Johnson and Larry Bird “raised television ratings by around 30%, in addition to their
effect on paid attendance.” However, this evidence may not apply to all sports: the English
Premier League in particular contains many clubs that are paying players beyond their
means, resulting in huge losses which are maintained by benevolent owners who subsidise
the shortfalls with earnings from other investments. In 2009-2010, 80 % (16 out of 20) of
the EPL’s clubs made losses, despite an aggregate revenue of £2.1 billion [9]. In no other
industry would firms making such significant losses continue to pay premium rates for
players, suggesting the pay roll is simply too expensive - the players’ marginal revenue
productivity has been miscalculated or else ignored and players are therefore earning too
much money. As former Football League chairman Lord Mawhinney said, "Football doesn't
have an income problem. It has a spending problem."[5] In 2011UEFA introduced the
“Financial Fair Play” project, which, although not officially a wage cap, aimed to discouraged
clubs from spending beyond their means by threatening a ban from the league as a
punishment. However, loopholes in the legislation have meant that the effect on wages is
yet to be seen. The following conditions have given clubs flexibility in continuing to pay high
prices for talent: each club must break even, although it can make a €45 million loss in the
first two years (the transition period (2011-2013), and then a maximum of €30 million over
the next three years (2013-2016), and in the three years after that (2016-2019)[9]. Regarding
legislation then, it seems a reduction in wages is a long way off in the EPL, despite the fact
that players are being paid above the amount they are benefitting the club.
One objection to this is the amount of benefit that sports stars contribute to society.
Dimitrov et al. Found that sport generated €707bn in 2004 (3.7% of EU GDP) and
employment or 15 million people (5.4% of total labour force) [10]. In addition, endorsements
such as using sports stars as role models for exercise programmes will, if successful, lead to
a decrease in obesity and health care costs in the long run. In contrast, sports stars
endorsing demerit goods such as junk food, for example LeBron James, Dwight Howard, and
Kobe Bryant being involved in a McDonald’s advertisement, could lead to increased health
problems and therefore health costs in the long run. When taking this into consideration,
along with benefits that come with big events such as the World Cup or the Olympic Games,
it is clear that the revenue a sports star earns for their club is not the only factor that needs
to be taken into account. Following low levels of GDP from the recession in 2009, London
hosted the 2012 Olympic Games and saw a spike in GDP due to increased tourism and
investment. A similar effect was seen in 2010 when South Africa hosted the FIFA World Cup.
More controversially, Floyd Mayweather (ranked number 15 in Table 1) was found guilty of
domestic violence in 2012. He was given a (lenient) sentence, and was then permitted to
serve his sentence after his next boxing match because of the negative effect his being
incarcerated would have on the Nevada economy [11]. In this way, the wages of the top
earning sports stars seem almost reasonable, even when faced with comparisons such as
Gareth Bales’ recent record breaking signing with Real Madrid, which will mean that he will
earn double the yearly salary of UK Prime Minister David Cameron within just a week of
work. [5]
A possible solution to the staggering wages is for governing bodies to introduce wage caps.
This policy has already been put into place in many sports, particularly in America, including:
ice hockey, American football, basketball, field hockey, rugby union and most recently, in
the American equivalent of the EPL, football. Some of these sports have seen increases in
revenue as a result, for example ice hockey. The National Hockey League (NHL) salary cap is
formally titled the "Upper Limit of the Payroll Range". For the 2011/12 season, the salary
cap was set at $64.3 million per team, with a maximum of $12.86 million for a player [12]. The
policy also contains a salary floor which is formally titled the "Lower Limit of the Payroll
Range", the minimum that each team must pay in player salaries. The lower limit is now
defined to be $16 million below the cap, so the 2011–12 minimum was $48.3 million. Since
the cap was introduced, league-wide revenues measured in USD have seen significant
increases [13], however some have attributed this to rising ticket prices. In the Australian
Football League, wage capping seems so have increased the competitive balance of the
industry (an important factor to consider when evaluating a policy in sport). Since the cap
was introduced in 1987, sixteen of the eighteen teams in the league have played in a
Preliminary Final, fourteen teams have played in a Grand Final, and eleven teams have won
the premiership. The three richest and most successful clubs, who won 42 of the
premierships between 1897 and 1987, have only won five of the premierships since. [14] This
increase in competitive balance was also found in a report by Dietl et al. entitled “The Effect
of Salary Caps in Professional Team Sports on Social Welfare”. They concluded that “a salary
cap may increase or decrease social welfare, depending upon the fans’ valuation of
competitive balance and aggregate talent. In any case, a binding cap will increase
competitive balance and will help to keep salary costs under control.” [15]
However, many are opposed to the concept of wage capping as it may reduce players’
incentives to improve. Once a player is at the top end of the allowed salary, acting as a
rational utility maximiser, there is seemingly no further incentive for them to improve their
game as it would not lead to any further gain for them in terms of monetary rewards. Not
only would they be earning a considerable amount of money, they would also be earning
more than anyone else, thus leaving little room for improvement.
In conclusion, the ever-rising wages of sports stars seems to be a result of not only market
forces but also the superstar phenomenon. Whether such high salaries are deserved
depends on whether the wages relate to the marginal revenue productivity of labour. In
some sports this may be justified, but in regards to the EPL, many clubs are taking
considerable losses and still increasing their aggregate salaries, suggesting significantly
higher salaries are not deserved. However, the social benefit produced by these stars must
also be taken into consideration. Wage capping as a policy has seen success in many sports
in terms of improving competitive balance and decreasing labour costs for teams. However,
the decreased incentive for improvement may mean other policies would be more effective,
for example a luxury tax, whereby clubs paying above the cap for players would be taxed
and the revenue divided between smaller teams.
References
[1] Adapted from Fort, Rodney (2003)
[2] Vonnegut, Kurt: “Bluebeard” (1987)
[3] Ruth, Babe (1931)
[4] Rosen, Sherwin: “The Economics of Superstars”, American Economic Review, 71 (1981)
[5] BBC News: “Viewpoints: Is a salary of £300,000 a week too much?” (2013)
[6] Gary Lineker Net Worth (www.therichest.com)
[7] Hausman & Leonard: “Superstars in the National Basketball Association: Economic Value
and Policy”, Journal of Labour Economics 15:4 (1997)
[8] Forbes Highest Paid Athletes of 2013 (www.forbes.com)
[9] Romer, Stephen: “Money Talks in the Premier League”, Economics Today, 19:2 (2011)
[10] Dimitrov at al.: “Study on the Contribution of Sport to Economic Growth and
Employment in the EU” (2006)
[11] CBS News: “Mayweather Vegas Jail Term Suspended until June 1” (2012)
[12] National Hockey League Players’ Association (2005)
[13] Forbes NHL Team Values (www.forbes.com)
[14] Australian Football League (www.afl.com.au)
[15] Dietl et al.: “The Effect of Salary Caps in Professional Team Sports on Social Welfare”
(2012)