What determines a person's salary? Why do professional athletes make so much money? People who work as firefighters, police officers or teachers are clearly more important to our society, yet they make much less money than jocks. What explains this?
- Learn how salaries are determined by the market forces of supply and demand.
- Consider the diamond-water paradox and how it applies to professional athletes' salaries.
- Understand the concepts of labor supply, demand and equilibrium.
Economists have long been fascinated by the diamond-water paradox. The question raised by this paradox is why water, a substance needed to sustain human life, is generally worth less than diamonds, a product that adds no real value to mankind.
This same question could be posed about professional athletes' salaries. How can athletes' salaries be so high when salaries for other occupations, that are clearly more important, are so much lower?
Have the students go the two Bureau of Labor Statistics Web links below and fill out the Occupational Data Chart using the data they find.
In addressing the question about athletes' salaries, this lesson acts as an introduction to the concept of labor markets. Teachers who wish to expand on the concept of labor markets can also use the following lessons:
Occupational Data Chart: This EconEdLink worksheet allows students to compare wages across different occupations.
Elementary School Teacher Wages: This BLS page provides average wages for elementary school teachers.
Athlete Wages: This BLS page provies average wages for professional athletes.
- The following two EconEdLink Lessons also cover the concept of labor markets.
Supply and Demand Graph: This page provides a supply and demand graph as an example for students.
Supply and Demand Graph
Men and Women Wage Difference Worksheet: This EconEdLink worksheet provides information related to wage differences between men and women.
Have the students consider the question about why professional athletes make so much money. Introduce the diamond-water paradox and how it relates to athletes' salaries. Next, discuss supply and demand in labor markets.
[The prices of goods are set in a market. Because diamonds are a scarce natural resource, they command a high price (teachers could draw a supply and demand curve for diamonds with very little supply - drawn to the left - and much demand). The salaries of workers are also set in a market, and professional athletes are a scarce resource in high demand (a similar supply and demand graph could be drawn, this time replacing price with salary on the Y-axis). In particular, superstar athletes are a very scarce resource. An NFL quarterback like Brett Favre—named Most Valuable Player three times to date—is one of only a few people in the world that can perform his job well and he therefore is rewarded with a salary approaching $8.5 million per year. For a visual representation of supply and demand, look at this supply and demand graph .]
Have the students answer the following questions:
Why do company CEO's make very high salaries while their secretaries make much less? [An individual's salary is valued at the margin. Meaning that the value of a CEO's labor v. that of a secretary depends on the next available unit of labor. Finding someone who can do the tasks assigned to the secretary is much easier on the margin, than being able to find someone who can do the tasks assigned to the CEO.]
Why do doctors make such high salaries while nurses' are much lower?
[An individual's salary is valued at the margin. Meaning that the value of a Doctor's labor v. that of a nurse depends on the next available unit of labor. Finding someone who can do the tasks assigned to the nurse is much easier on the margin, than being able to find someone who can do the tasks assigned to the Doctor. Also, due to restrictions on entry (medical school, licensing etc. it is much harder to become a doctor than to become a nurse. The barriers to entry for doctors further reduce the supply of available doctor's and thus raise their salaries.]
[Using the logic of supply and demand, explain why company CEOs make very high salaries while their secretaries make much less. Be sure to discuss the barriers to supply in the market for physicians.]
Professional athletes make high salaries because people with their skills are scarce. The demand and supply for people in various occupations determines the salaries in question—not the “importance” of the job to society. This finding is similar to the finding that diamonds are very expensive (while useless in a practical sense) yet water is very cheap (but life sustaining).
Have the students consider the questions below.
Is it true or false to say that high player salaries are the reason that pro sports ticket prices are so high? [It is false to say that high player salaries are the reason for expensive pro sports ticket prices. Salaries and ticket prices are set in their own markets by the forces of supply and demand.]
What occupations are likely to pay high salaries when you enter the labor force?
- What are some other factors that may affect employee wages? [Other factors that may affect wages are: gender, race, job conditions, danger, education, unique requirements, etc.]
In this lesson students have learned why athletes make more money than many people in other professions. Teachers who wish to extend the line of analysis introduced her might also ask students to consider differences in wages earned by men and women. To pursue this issue, have the students use the worksheet below.
Men and Women Wage Difference Worksheet - Teacher Version
Men and Women Wage Difference Worksheet - Student Version
“This is a great lesson. I feel students in high school relate to very well and it is a great way to show how supply and demand can affect price and need.”
“Excellent example of applying the diamond-water paradox to sports! It helps students understand supply and demand while providing insight into the high salaries sports superstars are paid.”