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Income Inequality in the NFL

May 28, 2008

By Steven Malanga

Owners in the National Football League made news last week when they decided to opt out of the final years of their collective bargaining agreement with the players’ union. Complaining that they are being squeezed by rising costs, league owners want, among other things, to institute a cap on salaries paid to rookies and to extend the period of time a player must remain with one team in order to end what they say is a growing disparity of salaries among players.

The players’ union has predictably balked at the owners’ demands, claiming that they would penalize rank-and-file players, who haven’t shared equally in the growing pot of money being devoted in the league to player salaries. What both sides contend, in their own way, is that much of the astonishing $4.5 billion in wages the league pays to players is going to a relatively few stars.

Hearing the back and forth between both sides, I wondered, is there really, as both sides seem to claim, 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? I took a look at the salary structure of the team with the biggest payroll in 2007, the Washington Redskins, who paid $123 million in salaries to 59 players, including those on the practice squad, over the course of the year. That’s a rich pot, but what I found was that the top quintile, or 20 percent, of the roster 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.

Is this fair? I suppose that depends on your definition of fairness. But 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.

What is perhaps even more interesting is that what holds true in the NFL apparently is true within other major sports leagues, even though they all have very different collective bargaining agreements and salary structures. Mark Perry, a professor of finance and economics at the University of Michigan, has calculated the income distribution of teams in Major League Baseball, where there is no salary cap. What he found is that in 2007, the top teams were paying between 66 percent and 77 percent of their salaries to only 25 percent of their rosters. Moreover, Perry found that over 20 years, as baseball has grown richer and more successful as a sport, recording record attendance and revenues, the share of salaries going to the top 25 percent has increased for those same teams. The Mets, contenders in both 1988 and 2007, paid 61 percent in 1988 and 70 percent in 2007 to the top quarter of their rosters.

In the NBA, where rosters are much smaller, the divide is just as stark. In the season that ended in spring 2007, the Phoenix Suns, with the leagues’ richest payroll, that is, with the most money to disburse among its players, paid 68 percent of total salaries to just four of 14 players.

What accounts for this madness among professional sports owners? Perry, writing about Major League Baseball salaries, opines that “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.

Facing such a dynamic in the labor market, there are a few things a society may be able to do to narrow the income gap for some people, like ensuring that public schools do the best job possible preparing kids for college, so that those with the potential for college don’t get their aspirations quashed because they’re stuck in a bad system.

But in a world in which not everyone is cut out to earn college or post-graduate degrees, as long as the economy keeps valuing the sheepskin so much it may be difficult to restrain income inequality. The goal in that case is to continue to ensure that the overall economy keeps growing so that everyone’s pie gets bigger, even if it’s impossible to micromanage how the pie is cut up.

After all, the NFL has fewer than 1,700 players, compared to a U.S. workforce of some 138 million, and the league employs a variety of rigorous mechanisms to redistribute income, yet it hasn’t done a very good job of smoothing out the rough edges of income inequality. They’re all getting richer in the NFL, just not at exactly same rate.

Steven Malanga is an editor for RealClearMarkets and a senior fellow at the Manhattan Institute

Original Source: http://www.realclearmarkets.com/articles/2008/05/income_inequality_in_the_nfl.html

 

 
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