What is This Supposed to Tell Us?

I must be missing something, becasue I don't get the point of this. This is Greg Mankiw:

Inequality Everywhere You Look, by Greg Mankiw:

Econ prof Mark Perry examines the incomes of professional football players and reports

the pattern of income distribution in the NFL is strikingly similar to the income inequality of the general population, and is actually slightly greater in the NFL....perhaps this pattern of income distribution is a natural and expected outcome of any extremely competitive environment where talent is scare, valuable and highly paid, whether it's the NFL or the overall economy.

So, is Greg saying that most workers are like the unionized workers in the NFL who enjoy considerable market power (check out the minimum salary, the retirement package, and the health and other benefits), and that unionized workers who are paid minimum compensation levels and work for and divide up a fixed percentage of gross revenues, i.e. work under a salary cap, are "natural and expected"?

And don't you think the presence of a salary cap (in conjunction with the minimum salaries by experience and the union) has an influence on the distribution? The table only shows "the 4 teams with the highest overall payrolls" - I assume that is a typo and should be five, not four - but what does it look like for other teams? Are they more equal than the U.S. economy? With a fixed number of players and more salary to disperse, it's very likely the teams with the highest caps would show the most inequality, so are the teams at the lower end more equal than the U.S. as a whole? If you believe the highly paid players in the NFL represent and tell us something about the economy as a whole (I obviously have my doubts), why present just five teams instead of the average across all teams? Does the NFL distribution also track the U.S. distribution at other common break points, e.g. 90-10 and 99-1, rather than at just 75-25, or is it just this one point that they are approximately equal (when the sample is limited to these teams)?.

What is this supposed to tell us?

[One other note. At the end of the post by Mark Perry, he says:

Consider that Baltimore Ravens' Steve McNair's 2006 salary of $12 million was 106 times the salary of the lowest paid Raven, Ikechuku Ndukwe, who made only $113,325. Isn't that comparison about as meaningless as the comparison between a CEO's salary and the salary of the lowest paid member of the organization?

The minimum salary that year for someone with Ndukwe's experience was $275,000. If you take (7/17) times the minimum, guess what you get? It's $113,325. That is, this compares a player who was active less than half the season (seven of the seventeen games) to a player who was on the team for the full season. Meaningless or not, let's get it right. The actual McNair-to-rookie minimum ratio is only 43.6 to 1 which shows more equality that what the typical CEO earns relative to the lowest paid members of the organization. Also, we could think about what really defines the "organization" in terms of what we are trying to measure - it may be more than just the players.]

Here's another view:

A Naturalistic Fallacy Revival", Economic Investigations: In his recent post, Inequality Everywhere You Look, Prof. Mankiw, quotes (approvingly, I suppose) Mark Perry and his data on inequality in sports teams income…

[…] perhaps this pattern of income distribution is a natural and expected outcome of any extremely competitive environment where talent is scare, valuable and highly paid, whether it’s the NFL or the overall economy.

Something being “natural” is no argument in favor of its continuous existence. Malaria and hepatitis and diabetes are all very natural and we have no problem fighting them. No one in their right mind will argue that we should let children die because fever is natural. Come on, people! We even have a label for that, the naturalistic fallacy.

I hope we’re not losing The Mankiw to the Dark Side! The Dark Side is the set of people who’s say anything to advance their political cause, come what may. (Left and Right, it’s all the same.) — Actually, I’m sure we’re not losing Mankiw to that, I’m just being overly dramatic because he’s usually above such tactics. Still, to quote that particular phrase…

Mankiw wrote in his critique of RBC that “The Keynesian school believes that understanding economic fluctuations requires […] also appreciating the possibility of market failure on a grand scale.” But what would the naturalistic fallacy imply here?

There’s “market failure on a grand scale” but it’s OK, because it’s natural in “any extremely competitive environment where talent is scare, valuable and highly paid”.

Hypothetically speaking, if it’s OK to fight the cyclical pathologies of the US business cycle because of our moral concerns, even though these pathologies are “natural”, why shouldn’t the same logic be applied to income inequality?

P.S. To avoid any misunderstanding, from casual readers, I’m not defending redistributionism. I think inequality is irrelevant (other than equal treatment before the law, regardless of sex, race, wealth or income). I’m more libertarian than the hypothetical love-child of Jefferson and Ayn Rand, but while I love liberty a lot, I don’t love it enough to tolerate the naturalistic fallacy and similar tactics.

Comments

[Winslow R.]

"I hope we’re not losing The Mankiw to the Dark Side! .... Actually, I’m sure we’re not losing Mankiw to that, I’m just being overly dramatic ...."

I find this tap dance a bit too tenacious.

At what point will Mankiw finally lose the respect of the economic profession?

[2slugbaits]

Doesn't this just show the power of monopoly rents? Many football players would be thrilled to play for a lot less money, but because teams can only have 11 players on the field at a time there is a big premium on skill. You cannot substitute two mediocre players for one star. Skill is not fungible and the owner of that skill set can extract significant rents from owners. Of course, no one has much sympathy for the owners (me included), so I don't have a problem with players having big salaries. But we should be clear that those salaries are rents. Is that Greg Mankiw's idea of the way our economy should be organized?

[nu]

when his paper are as bad as his blog ?

or actually never, he's smart and knows how not to put himself too out there. (during the SCHIP debate he just quoted two POVs, and he never openly said he approved some of the fallacious arguments)

[nu]

The monopoly rent exists on the side of the employers and the employees. nobody can enter the competition without paying a high entry cost (franchise) and adopting existing techniques (or prices, or organization). and chances of failure are minimized too.

[robertdfeinman]

Robert H. Frank has made a career out of explaining the winner take all society. Perhaps someone might get him to comment.

[pgl]

Gabriel is hoping Mankiw has not already gone to the "Dark Side". Gabriel is more optimistic than yours truly.

[Denis Drew]

NFL rookies definitely have to get a rookies union, or at least a first three-yearers union, to force teams -- who could not operate without them -- to pay them closer to what they are worth. Where is the rookie Jimmy Hoffa?

I finally figured out for myself this morning (as many doubtlessly have figured out before) that labor -- or anything else -- is worth the MAXIMUM that it can extract from the market before the market says it is not worth it: (morally?) justifying the economic function of labor unions. Ownership getting labor for any lower price than it would be willing to pay because of labor bargaining weakness is the same as ownership collecting rent from labor (an all the market will bear minimum wage also comes to mind).

I suspect that (morally?) overpriced CEOs and ballplayers (seeming to contradict myself) are a product of lack of pressure on their incomes beginning right at the bottom of the income chain (did I invent "income chain" too?; good day's work for a cab driver) and works its way up the income scale until some bargaining pressure from labor's side of the table finally appears: if you squeeze a toothpaste tube on the bottom it comes out the top syndrome.

CEO incomes in particular would certainly be under more pressure from stockholders if corporations were struggling under maximum labor pressure for their share of the profit -- instead of dancing on American labor's grave and vacuuming up all the cream for ownership.

Perhaps corporations would have less money to pay ballplayers (through buying game TV commercials) if they were not floating in so much profit that the players agents sense the very much can be skimmed (not blaming players or CEOs -- blaming American labor for mostly all sleeping at the pressure switch).

[spencer]

Maybe they are trying to make the point that NFL salaries are set by a union in a monopolistic environment and are not the product of a free market just like the salaries of Chief Executive Officers.

[ken melvin]

Pointless; unless he's proposing it as a model for the nation's economy.

[save_the_rustbelt]

Mark Perry, as I remember, is from the George Mason (Cafe Hayek) crowd of free market absolutists.

Since he got stuck at the Flint campus of UM he must not be top tier.

Mankiw is a pompous egomaniac who shills for himself constantly. He is, of course, a Bush-ite. Bush-ites think we should cut taxes, start elective wars, and let our kids die for lack of armor.

[dale]

"I think inequality is irrelevant..."
That's all I need to know about this guy.

[James Killus]

Doesn't "losing someone to the Dark Side" imply that they were once on the Bright Side?

I can't really say that I ever found Mankiw that bright.

[calmo]

Uh-oh.
Killus thinks Mankiw is dim.
Me, I figured "the Dark Side" meant...you know, Satan.
Darth Vader, if you have advanced beyond Sunday School...all the way to Popular Culture (whateva rdf says is on the TV we both don't have).
dale, arm-wrestling melvin for shortest posts on the net, thinks he can escape with this so crispy bit:

"I think inequality is irrelevant..."
That's all I need to know about this guy.

And that is not the only reason little me is slappin it in yo face again...no, only the Mighty Mankiw thinks like this, and coming from any lessers like ourselves (come on admit it, we are just so irrelevant after Mankiw thinks) is so redundant so eraserable so disposable....ok, dale, you have our attention.

[andyw]

Hmmm. One doesn't have to look very far to see that the NFL has an artificial economy. Indeed, one only has to look at the color of the coaches vs. that of the players. Is this about talent or about the prejudices of the owners?

Most importantly, what about the abuse of steroids and painkillers? Regardless of the top or bottom salaries, the players are in an unequal labor situation where they are forced/coerced into unethical compromises in order to maintain their status on the team. This is not merely about talent, it is about the willingness to _sacrifice body and mind_ in order to make the game worthwhile. A couple of years in the NFL do not make a career, they make a car salesman. Yes, these players earn a lot of money, but they are often from poor backgrounds and have few if any protective factors beyond their salary. This makes enormous sacrifice seem worth the cost, regardless of the payscale. (Poverty is not absolute, but relative...)

[Lafayette]

MT: What is this supposed to tell us?

Not a helluva lot, I suspect.

What bearing does the income of professional sport practitioners have to do with income inequality in the US -- other than the fact that their professional ticket was not an escalator ride up the income ladder but a rocket boost.

Frankly, I cannot see the meaning of this at all -- except that they are one of the many aberrations of the Celebrity Business. People who have an art or a talent and are paid monstrously well to demonstrate it.

Spectator sports is of less consequence to the well-being of our citizens than the games were to Rome. At least in Rome, the reign of an emperor depended upon how well or not he could put on the games in the Coliseum.

[calmo]

andyw, such a post --no "hmmmm"in about it...I'm takin your lurker spot so you can keep typin.
I know when to sit down an pay attention.

Ok, you go andy.

[skeptonomist]

If an NFL player doesn't perform, he is cut. Athletes do not get drafted or get paid according to how friendly or obligated the board is.

There is no correlation of CEO pay with performance, and they are not in a free market. The real owners of corporations are not in control of payment scales - they are set by an inner circle which only occasionally acknowledges the interests of stockholders.

[Sandy]

I'm not sure what Mark T.'s point is. The salary cap and salary minimum serve to LIMIT the dispersion of NFL players' salaries, so those factors don't constitute any kind of objection to the use of NFL data. As for Mankiw's larger point, I believe it is intended as an example in the spirit of Nozick's argument in "Anarchy, State, and Utopia" about the justice of inequality that arises from voluntary transactions. (Nozick's example, IIRC, was also drawn from the world of sports.) That point is, if we begin from a state of complete equality, differences in tastes and abilities will almost certainly mean that voluntary exchange will lead to some degree of inequality. This calls into question the ethical basis for redistribution.

[Sandy - I think you missed the point - that's why you aren't sure what it is - it's the variation in the cap across teams, not its existence, that is at issue, and that the existence of such constraints means it is not a good model for the general economy (and even without the constraints, and all the other problems, it's a classic "superstar" model which does not carry over to the broader economy). You also seem to have missed the point about defining the organization properly before conducting the measurements, etc. - Mark Thoma]

[Sandy]

If you look at the table you posted, Mankiw's point quite clearly is the marked SIMILARITY of interteam variation in the share of income earned by the top 25%, as well as its rough comparability to the figure for the US in general. The fact that the salary cap varies from team to team has nothing at all to do with this. To which he might have added, as you've pointed out, the NFL's inequality exists despite the presence of a players' union. Salary caps are going to limit bidding for superstars, not increase it.

Mankiw's table is a cute little post whose meaning seems quite clear from its title. I think you're making a mountain out of a molehill here.

[Using this to imply that the US distribution is the result of a natural process is not cute at all, it's misleading - the comparison has no validity, so why make it at all? Why are you making it? Do you think the distribution of player salaries informs us in any way about the US distribution (because that's the objection, using it to imply that the US distribution is the result of a "natural" process). And as for your assertion that the variation in the salary cap has no effect, the top teams were chosen for a reason (see the original post for a bit more, though it wasn't completely clear on this point). And in any case, we agree - when the cap is lower, and with the minimum, there is less likely to be less dispersion, which is exactly what I said. Doesn't have to come out that way mathematically, but it seems likely that it would - Mark Thoma].

[richard]

I wonder if this isn't pointing to income distributions and Zipf's law?

There are lot's of phenomenon that order themselves in curiously parallel fashion. The distribution of city size versus number of cities looks similar to word frequencies, and I've been told that the distribution of returns from equity trandes looks similar to the distribution of the speed of molecules in a gas ( a small number that are very fast and a large number that move sluggishly).

I'm playing devil's advocate here, but couldn't he be playing Zeno's old game: it is proved by pointing (when Zeno was told that motion is impossible, he's said to have pointed at someone who was walking by).

[Mark Thoma]

I wondered about that too - a fractal pattern that repeats itself at different scales of resolution.

[Alex]

If you don't mind an outsiders comment, I've lived in the UK (no salary caps in sports) and Australia (salary caps).

The results are clear. Sports with salary caps keep competitions interesting. SPorts without (live UK soccer) get dominated by the 3 richest teams.

In short, salary caps work.