One of the stories told in Sports Economics is that we can use data from sports to measure the economic value -- or what economists refer to as "marginal revenue product" -- of an athlete. All one needs is a measure of a worker's productivity and data on revenue from the sport. In fact -- as I recently demonstrated at Forbes.com -- sometimes you can make an estimate with just data on revenue. Sports Economics reviews three different approaches to measuring a worker's value. The one I prefer is the approach taken in Chapter Nine to measure the economic value of each member of the men's basketball team at Duke University.
In the NBA (as well as the NHL), the players are paid 50% of league revenue. If Duke University followed that approach, then $16.9 million would be paid to the players that season.
If this revenue was allocated according to how many wins each player produced for this team, then a player like Jahill Okafor -- who produced 6.5 wins in 2014-15 -- would be worth more than $3 million. Obviously, this is far more than the cost of attending Duke University.
And that means Okafor was paid less than the revenue he generated. That also means -- by definition -- he was exploited.
Then this past week I used a somewhat similar approach at Forbes.com to measure the economic value of women in college hockey. Because I don't have data on how many wins each hockey player produces, though, I took a slightly different approach. If we assume the NHL can measure wins (not entirely sure that is correct!) and that the NHL is paying players for their wins production (not entirely sure that is correct!) then we can use the distribution of salaries in the NHL to see how revenue would be allocated in women's college hockey if colleges followed the NHL model.
The results indicated that -- on average -- the women of Team USA generated more than $140,000 in revenue their last year in college. And given the value of a scholarship, that suggest many of these women were exploited.
There have been two objections raised to this analysis. First, people wonder about teams who have expenses greater than their revenues. In discussing expense data in colleges we must first note -- as mentioned in Chapter Nine of Sports Economics -- that this data seems problematic. Specifically, for about half the women's college basketball teams analyzed the revenue data self-reported to the U.S. Department of Education was exactly equal to the expense data that was self-reported. This is odd because - as any student of economics should understand -- the process that determines a firm's revenue is largely independent from the process that determines its costs. For these two numbers to be exactly equal suggests something unusual happening.
In Sports Economics it was argue that "something unusual" was related to the non-profit status of schools. Non-profits -- like universities -- have an incentive to spend all their revenues. So as revenues rise so will expenses. And if athletic departments can, they will spend even more than the revenues that are accrued. In other words, expenses can exceed revenues.
Can workers be exploited if expenses exceed revenues? Again -- as any student of economics should understand -- that is most definitely possible. A worker's value is a function of how much output that worker produces and the revenue that output generates. It is entirely possible for a firm to receive more revenue from a worker than it pays the worker in wages; and through mismanagement of the rest of the firm end up having total costs in excess of total revenues. When that happens, the worker is still exploited. Let me give an example to illustrate this point. Imagine you worked for a firm and you generated $50,000 in value but the firm only paid you $30,000. By definition, you are exploited. But let's say your boss now told you that the firm was losing money. Does that mean you are no longer exploited? Of course not. You are still generating more money than you are paid. The fact your boss can't manage the firm doesn't change the definition of exploitation.
Now that we understand what it means to be exploited we should emphasize that not all college athletes are producing more revenue than what they receive in a scholarship. This leads to another issue people have raised. Should players who are not exploited be paying for some of their college education?
I imagine that is a possible outcome. But I think that's unlikely. One issue to remember is that the revenue numbers reported to the U.S. Department of Education are about ticket sales, broadcasting revenue and donations (yes, donations count!). But these numbers do not include a measure of how sports promote the name of a university. For example, how many people in the nation would know about Gonzaga University without its men's basketball team? That marketing effect is part of the value of athletics to a college. Therefore, it might make sense for a school to spend more on athletes than the explicit revenue the athletes generate.
Of course, it's possible these athletes might also negotiate a salary that is less than these values. In the end, though, this should not be the business of the NCAA or the government. What wage these athletes get paid should simply be the business of the schools and the athletes.