Question:
Why are professional athletes paid so much? Discuss. Include economic concepts/terminology (marginal revenue product)
Wage Determination:
Firms will hire workers up until the point when the additional (marginal) cost of hiring those workers exceeds the additional revenue those workers bring to the firm. The price where the marginal cost of hiring an additional worker equals the revenue that the worker brings in, is the wage. The marginal revenue is determined by the productivity of the workers and the price of the good or service they are being sold.
Answer and Explanation:1
All worker wages are determined by firms finding a profit maximizing level of hiring. In other words, firms will hire workers up until the marginal revenue product of labor equals the wage. The marginal revenue product is the per worker productivity, multiplied by the price of the good or service being sold. Its the productivity and the value of the labor that is how firms decide how much to offer workers. There are workers who are very productive in low priced product markets, who do not earn high wages because the price of the product is low. Low price retail workers would be an example here. In order to be paid more, the prices of the products they sell will have to rise. Similarly in higher priced markets, lower productivity workers do not earn as much as high productivity workers. Lower productivity nurses in the US earn more than higher productivity custodians because the price of the final product changes the marginal revenue product.
This brings us to professional athletes. Professional athlete wages are determined the same as other workers, their wage matches the marginal revenue product of their labor. The price of the top leagues in the US and Europe is very high due to ticket prices, but also due to television contracts. The product that the top athletes are selling is very high. In the US, the high productivity athletes are paid much more than lower skilled athletes. There is also a limited supply of top athletes that consumers are willing to pay to see, so a premium is paid to those athletes. The top US men's soccer league (MLS) players are paid much more than players from the top women's soccer league (NWSL). The productivity levels might be similar but the price of the products sold is very different. Because of higher ticket sales and television ratings, MLS player MRP is much higher than NWSL players, so their wages are higher. Similarly, professional athletes who play lacrosse and rugby earn less than baseball or basketball players in the US. In the larger leagues in the US, the workers are unionized so they can collectively bargain for higher wages for the lower productivity workers. Some leagues have a cap on player wages, but the top players can often earn more wages from product endorsem*nts as well.
