Do sports stars deserve multi-million dollar salaries? Well, yes, some of them do
“No player is worth that much money” So said a friend of mine of Joe Mauer’s eight-year, $184 million contract with the Twins. According to a recent article in the Star Tribune, Minnesota sports fans think that he was “overpaid and underdelivered”. As Mauer’s career winds down, these fans are supposedly switching their dissatisfaction to Zach Parise of the Wild, with his 13-year, $98 million contract.
The salaries of sports stars might be much higher than most. But in their economics they are the same. The examples of Mauer, Parisie, and others illustrate some interesting aspects of labor markets and wages.
Yes, some players can be worth that much money…
Last week I wrote about the Lynx who many people deem ‘underpaid’ relative to their male counterparts in the NBA. I made the point that what matters for pay is not effort (input) but productivity (output). If an employer thinks a worker will add $1 million a year to their revenues it will pay that employer to hire that worker at any wage up to $1 million a year. Even at a salary of $900,000 a year, the employer will be adding more to their revenues ($1 million) than to their costs ($900,000) and making a profit on the difference ($100,000).
And there are lots of ways that sports stars can generate revenues for their employers. A Michael Jordan will win you prize money. A Dennis Rodman might sell tickets for non-sporting reasons. A plain Vikings jersey might sell for $80. The low cost act of putting the letters P E T E R S O N on the back might add another $50 to the sales price.
If, over the course of their contracts, Joe Mauer and Zach Parise generate at least $184 million and $98 million in revenue for the Twins and the Wild respectively through these various avenues, they will have been worth that money.
…but you can only ‘know’ that after the fact
It is important to note that we are talking about estimates here. The LA Galaxy might have had a pretty good idea that signing David Beckham would boost their revenues, but by how much?
Indeed, the history of sports is littered with marquee signings that didn’t pay off. My soccer team back in England once signed a guy called John Ebbrell for a then club record of £1.2 million. He was subbed with an ankle injury at half time in his first match for us and never played soccer again. When the Falcons signed a 10 year, $130 million contract extension (with $37 million guaranteed) with Michael Vick in December 2004, they can hardly have predicted that he would get caught up in a dogfighting scandal, leading to his suspension and 23 months in federal prison. Likewise, when the Mets gave Oliver Perez a $36 million, three year contract in 2009, they can’t have foreseen him getting patellar tendinitis three months later.
This illustrates what entrepreneurs, such as employers, actually do. They have to plan ahead but the future is unknowable with complete certainty (though the Seahawks should have had some idea what they were getting with Percy Harvin). They may get a Danielle Hunter. They may get a Riley Reiff. They can assign probabilities to these outcomes but some uncertainty will always remain. Entrepreneurs/employers carry that risk.
Sports stars are workers like anybody else
So the economics of the market for third basemen is the same as the economics of the market for line cooks. The major difference is in how people perceive them.
For example, imagine if a line cook was adding $50 an hour to his employer’s revenue but was only being paid $9.50 an hour. Many people would want to see that line cook get a greater share of that $50. ‘The worker should get more of their product’, they say.
But, for some reason, when it comes to sports stars, this goes out the window.
People will pay to go to the US Bank stadium, Target Field, Excel Center, or Target Center. They will watch the Vikings, Twins, Wild, or Timberwolves at home or in the bar, with cable providers and broadcasters kicking back to the franchises. The price of these tickets or subscriptions is set by supply and demand, like any price. So, the price of Vikings tickets is, say, $100. Multiply that by 66,000 and you get $6.6 million ticket revenue a game. Who gets that money? Its either the team’s owners (the capitalists, boo! hiss!) or its players (the honest laborer, hurrah!).
And yet people complain that sports stars are paid too much. When they say that players salaries are too high, they are really only arguing that the owners remuneration is too low. Sports is probably the only industry in America where a majority of people think the workers should get a smaller share of their marginal product.
Anyway, lets hope the Vikings earn their money this Sunday.
John Phelan is an economist at the Center of the American Experiment.