Why Athletes Get Paid So Much and We Don't

A lot of people wonder why athletes and entertainers get paid so much.  You know the old cliché, how can we pay teachers so little but pay athletes $25 million to swing a bat?  It seems a little ridiculous, doesn’t it?

The reason for their inflated salaries lies in a fundamental concept of economics.  Basic economics states that people get paid in exchange for the services they provide their employers.   Having said that, another fundamental concept is the idea of service consumption and how it relates to salaries.  As an employee a company consumes your service.  Typically, only one company can consume your service at a time; therefore, only one income stream can be applied to that service per unit time.

Athletes and entertainers are different.  For them the service they provide is not consumed so much by their franchise or studio, but by sports fans and moviegoers.   Athletes provide a service which fans consume, not the franchise itself.  Movie stars provide a service that moviegoers consume, not so much the studio releasing the film.

The beauty of it is that the service can be consumed by more than one individual per unit time.  Think about it, a stadium of people watching A-Rod consumes his service at the same time, which means his service is available to thousands of people in unison.  Factor in television and you’ve got a service available to millions of people all at once.  The more consumers of your service per unit time means you have a greater source of income per unit time.  In other words, you can make millions of dollars while doing no more work than any other person.  The difference is the level of consumption of that service.

For famous people, the A-Rods and George Clooneys, the value added because of their expertise and fame only augments the fact that millions of people can consume their service at a single time.  For the average Joe, this is like having an MBA that a million companies are willing to pay for versus having an undergraduate degree consumed by millions of companies.  This explains the reason for the range of salaries in sports and entertainment.  Note, however, that even unknown relief pitchers command six-figure salaries due to the level of service consumption available to them.  The difference between them and Brandon Webb is expertise and command of the game.

That’s pretty much the reason behind it all.  It is not so much a case of skewed priorities in our society, but more an example of economics supporting the situation.  So next time somebody makes a comment about athletes’ salaries you can explain the economic underpinnings of it!