When I teach lessons in business and economics, a few people, even among MBA students, will express frustration or annoyance about who actually makes the big bucks in our economy, and who, according to those expressing outrage, should earn the big dollars.
Some are annoyed by CEOs of large businesses making so much more than those on the assembly line, covering the sales floor, or driving the trucks. Another area of irritation deals with people in less important fields — such as sports and entertainment — making so much more than those involved in critical work, such as educating our children.
If individuals pursuing graduate degrees in the field of business express these feelings, then such sentiments probably run throughout much of society. A new Rasmussen Reports survey raised the topic.
In a survey of adults early this month, Rasmussen asked which professions were worthy of the highest salaries. Topping the list were teachers, with 30 percent of Americans saying educators should get paid the most. Running a distant second were military personnel at 14 percent and doctors at 13 percent. At 10 percent, business leaders barely edged out the President of the United States at nine percent.
At the bottom were “celebrities” at four percent, and professional athletes at only two percent.
But aren’t “celebrities” (putting aside the issue of how “celebrities” is defined) and pro athletes high earners? Of course. But why should Cincinnati Reds first baseman Joey Votto or Yankees third baseman Alex Rodriguez, for example, be paid lavishly, while teachers earn far less? After all, don’t most people would agree with the idea that those teaching America’s children are engaged in something more important than fielding ground balls? The same question can be asked about TV and movie stars as well. So, what’s the deal?
Well, first, people need to put aside how they feel, and deal with the economic realities of the marketplace. Let’s look at what actually determines pay in the marketplace.
As is the case with other goods and services, compensation is about demand relative to supply. And various factors influence that supply and demand.
For example, productivity and skills vary widely. If one possesses highly specialized skills, this will lead to higher pay. That compensation will be driven higher if those skills are in high demand. Likewise, the more productive an individual is, the higher that person’s earnings.
Skills and productivity are affected by natural talent, work ethic, and investments made in human capital. Those investments can come in form of education, practice, experience, and knowledge.
Economists refer to the “marginal revenue product” of a worker. What that essentially means is that the greater a worker’s contribution to a firm’s revenue, due to productivity and skills, the greater the compensation.
So, what about the cases of highly paid CEOs, athletes and entertainers?
Well, the CEO makes decisions determining the firm’s profitability and very existence, thereby affecting employees, customers and other enterprises with which the firm does business. The responsibilities and impact of the CEO dwarf those made by the factory worker, salesman or truck driver. For good measure, business leaders today have far more to deal with than in decades past, including more intense global competition, rapidly changing technology, and increased government interference.
Meanwhile, few people on the planet have the abilities to win the National League Most Valuable Player award, as Votto did in 2010, or to excel in hitting and fielding at the major league level in Yankee Stadium, as is the case with Rodriguez. In addition, consumers willingly spend billions of dollars following Major League Baseball each year.
As for Hollywood entertainers, take the headline case of Charlie Sheen. Public opinion has turned against Sheen, which is not surprising given his bizarre behavior. Naturally, many now wonder how someone like this could earn so much money? The answer is that the same public currently disgusted by Sheen and his antics previously made his television show “Three and a Half Men” highly popular and a big revenue generator for CBS.
In the end, the supply of people who can be teachers, factory workers, salesmen or truck drivers is massive compared to the individuals who can run an entire business profitably, direct or star in a blockbuster movie or popular television show, or play and excel at big league baseball.
No doubt, even after digesting these economic realities, some people will demand that something be done to fix what they see as a gross injustice. Consider, for example, that a 2010 Rasmussen poll of New Yorkers found that 51 percent believed athletes should not paid more than teachers. This, of course, would mean government stepping in to dictate salaries. Ridiculous? Well, a 2009 poll found that 30 percent of Americans wanted the government to limit pay for athletes and movie stars.
How would salaries be set? Politicians and government bureaucrats, guided by political incentives and influences, would overrule the decisions that hundreds of millions of consumers make everyday in the marketplace. Indeed, government would have to take control of those resources. Now, there’s an idea born of economic ignorance that should generate real moral outrage.
Raymond J. Keating, chief economist for the Small Business & Entrepreneurship Council, can be reached at email@example.com. His new book is titled Warrior Monk: A Pastor Stephen Grant Novel.