Wednesday, May 28, 2008

Krugman a Football Fan?

Steve Malanga points out that the socialistic, unionized NFL (and most professional sports) has greater income inequality than the economy at large (and for entirely predictable reasons): there really...income inequality in the NFL? And if there is, does it say anything about the gap between the rich and the rest of us in society in general? ...what I found was that the top quintile, or 20 percent, of the roster [of the Washington Redskins] took home 63 percent of the money, and the top two quintiles earned 85 percent. The Skins’ aren’t an anomaly, even though they are one of the richest teams. The other teams at the top of the salary scale—the Pats and the Saints—devoted 62 percent and 60 percent of salaries, respectively, to a fifth of their players.

It was only slightly different at the bottom. The team with the lowest payroll in 2007, the Super Bowl-winning New York Giants (talk about value for your dollar), paid 59 percent of wages to the top 20 percent, and 78 percent to the richest 40 percent of players.

... by way of comparison, I took a look at how this income structure compares with household incomes in the United States. According to U.S. Census data, the top quintile, or 20 percent of households, captured about 51 percent of total family income, while the second quintile earned about 23 percent off all family income. Together, that amounts to about 74 percent of all household income. In other words, income is actually slightly more concentrated in the NFL than it is within our larger society, and there is a bigger gap between the richest and everyone else in football.

What makes this so astonishing is that the NFL has all sorts of mechanisms in place that we lack in our general labor market which are supposed to smooth out income inequality. For one thing, the NFL is entirely unionized, and we keep hearing (most recently from Barack Obama) that income inequality in America is in part a function of the decline in unions. The NFL also distributes talent to teams through a draft, which minimizes competition among employers for entry-level workers. No such check on bidding wars for the most talented exists within our general economy. The NFL has a cap on the amount of salaries it allows teams to pay, which presumably acts as a curb on salaries at the top of the wage scale. And players cannot jump to other teams until they have been in the league for four years, meaning that their employment mobility is far more limited than within our labor markets in general.

And Malanga finds roughly the same phenomenon in Major League Baseball and the NBA, noting that University of Michigan economist Mark Perry's work shows:
“above-average competence commands higher monetary rewards in an increasingly competitive” environment. Why? Because professional sports are quintessential human-capital industries, valuing the talents of individuals far more than anything else. The old saw about the new economy, that your assets walk out the door every night, is especially true in sports.

Still, it’s not as if the top players are capturing all of the rewards of the growth in professional sports, to the exclusion of everyone else. As MLB and especially the NFL have cashed in over the years, everyone’s share has grown. The total payroll of the Washington Redskins has doubled in the past five years. While the top players (who’ve changed over time) got a chunk of that gain, the median salary on the team also increased 85 percent to $855,000.

Something similar is going on in the rest of society, where the premium paid for talent has been rising, pushing up salaries fastest among those at the top even as everyone gains. In a highly influential paper published last year, Harvard economists Claudia Goldin and Lawrence Katz attributed rising income inequality not to the standard culprits we hear about in presidential campaigns—like globalization or the decline of unions—but rather to the growing premium that a knowledge-based economy places on education, especially on a college degree. The authors estimate that the returns on a college education actually fell from 1915 to 1950 as our universities supplied more grads than the economy could absorb, narrowing the income gap in the process between college grads and everyone else. That began to change, however, when rapid technological innovation created a demand, which has outstripped supply, for highly educated workers, something that began in earnest in the 1980s and has continued since then.

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