Once a month I do a radio call-in show where I discuss economic topics of current interest. I’ve been doing this program for more than 25 years, and there’s one thing I can count on. If a popular professional sports player has recently signed a large new contract, I’ll get many callers complaining that the pro star is getting too much money for playing a game, while other workers doing far more important jobs, such as police officers, nurses, and teachers, are not paid enough. How, the caller asks, can this be justified?
This illustrates a love-hate relationship many of us have with celebrities, such as professional sports players and movie and TV stars. On the one hand we’ll go to every game featuring our favorite player, buy replicas of the jersey and team hat, watch every movie and TV show of our favorite actor or actress, and buy every magazine with an article about him or her. But on the other hand, we’ll complain that the star makes too much money.
But that’s just it. The star makes a lot of money because people willingly spend money at the star’s performances and on products about the star or endorsed by the star. So it’s precisely fans who create the conditions for the big paydays earned by big-named stars.
All right, let’s introduce some economics here. The pay earned by a worker, whether that person is a baseball star or a fast-food worker, is importantly based on two factors. First is the revenue the worker can earn for the business. The more revenue a worker is responsible for earning, the more the business will be willing to pay the worker.
Second is the number of people who can do a particular kind of useful work. The fewer people who can do a particular kind of useful job, the fewer options companies will have in finding workers for that job, and the more they will have to pay each worker. Although many males would like to think they can hit or throw a 90 mph fastball, the truth is, very few can. So the supply of major league baseball players is extremely limited.
Understanding how these two factors interact can explain much about pay scales. Combine a job where the worker generates a large amount of revenue for the business and where few people can do this job, and “shazam” (to quote Gomer Pyle)—you have workers earning big paychecks. But at the other end of the scale, combine a job where the worker generates little revenue and where many people can do the job, and you have workers earning tiny paychecks.
I’ve given this explanation for the multimillion-dollar salaries of sports and media stars several times to my wife, who happens to be an elementary school teacher. She understands it, but still doesn’t like it. She still thinks it isn’t fair that people with less education than her, and doing something that is less “valuable” to society, get paid so much more than she does.
Well, three factors have combined to keep teacher salaries lower than what many would expect. First, although no one can deny that teaching is an important profession, a large number of people have the talent and capability to become teachers, so the supply of potential teachers is large.
Second, while pro teams and movie studios can estimate the revenue-generating ability of stars and use these estimates in their salary offers, it’s tough, virtually impossible, for schools to estimate the contribution of teachers to the future financial success of students. Say Mrs. Walden works very hard helping Timmy pass third-grade math. No one knows what this means for Timmy’s future occupation and salary, because Timmy’s career is so far away. Interestingly, one reason college teachers are paid more than elementary school teachers is there is more of a direct link between the educational achievement of college students and their future salaries.
And third, sports and media stars shop their skills and talents among many teams and studios. In most localities, teachers have limited ability to “shop” themselves among competing school districts. In fact, in most areas in North Carolina there is only one countywide public school system. Increasing the competition between public schools for teachers as well as for students would likely improve the salaries of the best teachers.
Is this all fair? You’ll have to decide that. But I can say that if you want the salaries of pro sports and movie stars to fall, stop watching them!