Athletes are Underpaid: The Economics of Player Salaries

What, am I crazy?  Peyton Manning of the Indianapolis Colts is probably a doubtful start for the rest of the 2011 season, and perhaps has made his last start of his Colts career (The Colts would owe Manning $28 million if they exercised his contract for another year at the end of 2011 – crazy to think about).  He is also due to make at a minimum $23.4 million this year – $20 million as a signing bonus for his new contract and $3.4 million in guaranteed salary.  Luckily I left myself an out – the problem with painting every sports contract with the “overpaid” brush is there is an army of athletes who will never touch the salaries which make us do a double take.  As Frédéric Bastiat wrote in his essay What is Seen and What is Not Seen, “Let us accustom ourselves, then, not to judge things solely by what is seen, but rather by what is not seen.”  This article requires a special shout-out to Nelson Smith at Financial Uproar who planted the seed – sorry I waited until the third week of NCAA football to write this!

Most Athletes Never Go Professional… or Never Make It

Starting with Pee Wee sports, there is a pretty well defined route to professional leagues.  Kids start from as young as 4 or 5 to learn the fundamentals of the game, and play for the sports teams of their schools or pickup games in their neighborhoods.  As athletes progress in age, there are sports camps, AAU teams, college camps, and other competitive travel teams which can get young athletes onto scouting radars.  Next up is usually (with the notable exception of Baseball, which has two paths to the pros) recruitment to an NCAA school.  Most athletes will attempt to play for Division I-A schools (football) or Major Conference teams (basketball) if they still harbor dreams of turning their talents into a sports career.  Finally, a few of those athletes will go on to be drafted by teams – and fewer still will get the huge contracts which we so often dismiss as absurd and obscene.

What am I saying here?  The first reason that ‘athletes’ are underpaid is because the odds are so stacked against “Athlete” as a career it is reasonable to think that those who make it should draw a large salary.  What we are missing out on is the millions of children who grew up dreaming they’d be the next Michael Jordan, Emmitt Smith or Babe Ruth (or Wayne Gretzky.  Or… Pelé?)  It’s a bias against the unseen – there has to be a reasonable reward at the end of the road for the number of athletes that actually make it out of the various stages of the game.  There are cuts at every stage – it’s a pyramid.  While there may be millions of young athletes, there are far less high school athletes.  Even more cuts happen for College and the Professional level, and every level of cuts costs the athlete more and more of sunk time and money which it took to get to that level.

NCAA Public Service Announcement: Most Go Pro in Something Other Than Sports

How large is the pool which the draft ends up drawing from?  In 2006, this CNN article pegged youth participation at 41 million.  As you can see from the above video, athletes (not just the four major sports) in the NCAA number 400,000.  As for the pros?  Let’s look at the four major sports:

Football (NFL): 32 players a round, 7 rounds means 224 players a year from the draft, plus a smattering of Free Agents – generally place kickers, punters, and the occasional retiree.  Of all the sports, Football is probably the most limited since the United States is the only country with a currently appreciable sports league.  Rosters are 53 players, plus up to a 5 man practice team, meaning there are between 1,696 and 1,856 players in the NFL.

Basketball (NBA): 30 players a round, 2 rounds means 60 players a year are drafted.  This is small, but NBA rosters are usually only around 12 – 15 players.  There are between 360 and 450 players in the NBA.

Baseball (MLB): Baseball is the exception to our draft rule, due to its nicely varied league levels and development teams (Low-A, High-A, AA, AAA, Majors).  It’s tough to pin down a hard number for draft size, but in 2006, 1,503 players were selected.  Most of them will never made a major league roster.  MLB has 25 man active rosters and a 40 man roster (and 30 teams), so depending on your count there are 750 or 1,200 plays in the majors at any one time.

Hockey (NHL): 30 players a round, 7 rounds means 210 players are drafted.  Hockey also has a lively minor league, but major league rosters number 23 players, so there are only 690 players at any one time on major league rosters.

Minimum Salaries are Low

Of the four majors, the NHL comes in with the highest minimum salary at $525,000.  Basketball players pull in $490,180 annually.  Baseball players pull in a minimum of $414,000.  Football players will make at least $375,000 annually.  Those numbers are huge – the 2010 median household income in the United States was $49,445.  However, when talking about career longevity we tend to cherry pick the most durable players we can think of – Robert Parish (21 seasons in NBA), Brett Favre (20 seasons in NFL), Wayne Gretzky (16 seasons, NHL), or Tim Wakefield (17 seasons and still active, MLB).  The truth is most players will see no where near the sorts of contracts we see from the Peyton Mannings and the Alex Rodriguezes of the Sports World – most will be closer to the minimum, and play out much shorter careers. 

From what I can find, NHL players average 5.66 seasons, NFL players 6.86, NBA players 4.81, and MLB players (again, skewed by the minor league system) 5.6.  All else being equal, the NBA would pay the highest minimum salary and the NFL the least, but the costs of entry are higher for sports like hockey and football due to equipment costs.  These numbers are also averages since median numbers are hard to find (but much less).  To give a hint as to the variability: the NBA study linked gives 4.81 as an average career but a standard deviation of 3.69, so all we can say is that 68% of NBA athletes have career lengths between 1.12 and 8.5 seasons.

Remember, that a college athlete drafted at 21 and out of the league 5 years later is still 26 years old.  Even with 5 years of large salaries, their future is not guaranteed.  It’s one of the reasons so many former players are broke, even some of the ones with salaries near the top of the ranges.

The Devastating Effect of Injuries

Let’s get this controversial part out of the way.  In hockey, with multiple junior leagues plus a waiver in the draft to allow teams to select professional athletes, the draft covers a wide range of athletes.  In baseball, there are basically two ways to get into the big leagues (outside of playing somewhere like Puerto Rico) – play in college, or get onto a low-A team in somewhere like the Cape Cod League.  Salaries are low for a low of these teams, but they are existant, unlike for the two sports referred to as the “Glamour” or “Money” sports – Football and Basketball.  Football and basketball have historically made the most money for colleges, had the most booster and recruiter involvement, and the most scandals.  One factor for this is the NCAA’s de facto monopoly on the talents of student athletes – the NBA has a minimum draft age of 19 years old, while NFL athletes must be at least 3 years post-high school.  The argument is often made that the leagues benefit from these rules – and they definitely do.  While there is an NBA D-league, there is no need for a minor league in the NFL.  Does the NCAA benefit?  Of course they do.  Member schools can hand out scholarships, which at face value are worth $30,000-$40,000, but realistically, many athletes are not going to school for their degree.  Anecdotally, many athletes end up with degrees in University Studies (my Alma Mater is USC, and I’m not so naive to think that other schools don’t have similar programs).  For every Rhodes Scholar, there will be many athletes who never even complete a degree.  All this while the school makes money from football and basketball and the NCAA makes money from member dues.  Who is hurt the most?  The players, who possibly are sitting on a lottery ticket with an expiration date – their athletic career.

All of what I wrote doesn’t excuse the scandals that plague the two glamour sports, but it goes a very long way to explaining them.  Everyone from USC to Oregon, Auburn to Ohio State, and now possibly the worst scandal we’ve seen in recent years in Miami can be traced back to a simple problem: there is a huge risk of injury when playing sports, one which, especially in football, may prevent athletes from ever making the money they are so close to receiving.  For every Reggie Bush, who makes deals to cash in on fleeting talent during a college career, there is someone like Jason White – a tragic figure who won a Heisman, came close on another, and due to knee injuries never contributed in the NFL.  The world will remember Reggie as the first ever ex-Heisman winner.  The world will remember Jason White’s incredible College Career in a trivia game in a sports bar somewhere, but meanwhile he is just one of the 400,000 NCAA athletes who went Pro in something other than sports.  From Cam Newton to Charles Barkley (sorry to pick on Auburn!), there is a generation of players – those we know about and those we don’t – that thought through these exact arguments in their heads.  Basketball’s looser age restrictions have prevented scandals as devastating as football, but there are certainly many to choose from.

For every ‘special talent’ who people claim will only be good in the NCAA (also a reason an athlete would take recruiter or booster money in college) there are many athletes who figure the risk of injury is so great it is worth the risk of accepting funds as a (forced) ameteur athlete.  We look at the NFL average career of 6.86 years and say, “that’s great… they get a huge amount of money for 7 seasons”.  However, we have to factor in the injury risk of playing at an incredibly high level in college – for what amounts to a minimum of three years.  Players who try to take the legal way out – Maurice Clarett, Mike Williams, now Terrelle Pryor (supplemental draft) – have had to skip their designated draft times, and certainly got paid less than they would if they had entered the regular draft.

Summing Up

So, the next time you think that athletes are overpaid, I hope you think back to this article.  There is no doubt in my mind that some of the contracts in the sports world grate on the nerves of my fellow members of the 9-5 crowd.  When we hear of guys making millions a dollar a year on police blotters, it’s normal to be a bit disgusted.  However, salaries are high but rational.  The extreme difficulty of developing the skills necessary to be a professional, staying injury-free until you can demonstrate those skills at the Pro level, then maintaining the skills for a reasonable number of years is so extreme that the salaries we see make a little more sense.  So go ahead, complain, but remember the special talents that never made it.  For every huge contract you can point at, I can point to journeyman players who make the league minimum, or college stars who never cashed in on their skills – the underpaid grunts of the sports world.  In the immortal words of Bastiat, remember the unseen.