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Why does Brett Favre make $8.5 million per year?

Key Economic Concepts:

• Demand
• Distribution of Income
• Division of Labor
• Human Capital
• Human Resources
• Income
• Labor
• Labor Market
• Resources
• Supply

Description:

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?

Lesson Objectives:

Students will:

• 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.

Introduction:

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?

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:

A Fair Wage?
http://www.econedlink.org/lessons/index.php?lesson=EM203&page=teacher

"Be All You Can Be"...For Minimum Wage?
http://www.econedlink.org/lessons/index.php?lesson=EM94&page=teacher

Resources:

Bureau of Labor Statistics Occupational Employment:

Elementary Teachers, Except Special Education:
www.bls.gov/oes/current/oes252021.htm ^[2]

Athletes:
www.bls.gov/oes/current/oes272021.htm ^[3]

Occupational Data Chart, Students may use this chart to record the information that they collect from the Bureau of Labor Statistics Occupational Employment Web page. A teacher's version of the Occupational Data Chart is also available with the correct answers included.

The instructor can use the Bureau of Labor Statistics Web link (listed below) to fill out the following worksheet as part of an optional extension activity.www.bls.gov/cps/wlf-table17-2005.pdf ^[4]

Process:

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 ^[1] .]

Conclusion:

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).

Assessment Activity:

Have the students answer the following questions:

[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.]

Extension Activity:

Have the students consider the questions below.

[1. Explain that this statement is clearly false. Salaries and ticket prices are set in their own markets by the forces of supply and demand. 2. Brainstorm with the students about what jobs in today's labor market will have higher wages. 3. Discuss other factors that may affect wages, such as 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

Links Used:

1. ^{^} "supply and demand graph" - (www.econedlink.org)
2. ^{^} "www.bls.gov/oes/current/oes252021.htm" - (www.bls.gov)
3. ^{^} "www.bls.gov/oes/current/oes272021.htm" - (www.bls.gov)
4. ^{^} "www.bls.gov/cps/wlf-table17-2005.pdf" - (www.bls.gov)

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