Why sports stars are paid more than teachers

Last September, Don Boudreaux wrote this letter:

Ms. Montgomery:

I regret that you’re offended by my claim that “Only by thinking at the margin can we correctly understand why the wages of life-saving first-responders are lower than are the wages of NFL players and of Hollywood starlets and why this fact is a good thing for society.”  You allege that “Real people know it’s wrong and dangerous that men playing games get paid so much more than men and women who save lives and educate our children.”

I agree that most people are troubled that the likes of Tom Brady and Jennifer Lawrence earn far higher pay than does any firefighter or school teacher.  But this reality reflects not people’s correct understanding of a failing economy but people’s incorrect understanding of a successful economy.  It reflects also a failure of economists to better teach basic economics to the general public.  So let me ask: would you prefer to live in a world in which the number of people who can skillfully fight fires and teach children is large but the number of people who can skillfully play sports and act is very tiny, or in a world in which the number of people who can skillfully fight fires and teach children is very tiny but the number of people who can skillfully play sports and act is large?

Boudreaux's argument is that sports and movie stars are paid more than teachers or firefighters because there are fewer of them relative to the demand for their labour. In comparison, the higher labour supply of teachers and firefighters (compared with demand for them) leads to lower equilibrium wages. However, labour supply is only part of the story. The more important part is that the supply is low 'relative to the demand for their labour'. It isn't so much that there are few potential sports and movie stars (arguably there are many wannabe stars who are nearly as good), but that the demand for them is so high.

Why is demand for sports and movie stars so high? Because of 'superstar effects', which were first described by Sherwin Rosen in the 1980s (and which I have written about before). If a worker can satisfy the demand (for entertainment, in this case) from many consumers, they get paid a higher wage (a 'superstar' wage). Essentially, the worker is rewarded for generating very high revenues for their employer. Since movies or sports are watched (and paid for) by many consumers, this generates a lot of revenue for movie production companies and sports teams, who pass on some of these high revenues to their stars as higher wages. I'm sure that if teachers or firefighters could satisfy the demands of a much greater number of consumers (presumably students or victims of fire, respectively), then they could earn superstar wages as well.

Maybe in the future, teachers who teach on MOOCs (Massive Open Online Courses) will earn superstar wages? After all, "Massive" implies that they will be satisfying the demand from a lot of students. Of course, MOOCs would need to start making some money first (which is another topic I have written on before, see here and here).

[HT: Marginal Revolution, last September]