Last month, the Economic Policy Institute launched its Raising America’s Pay initiative.
Highlighted by a keynote address from secretary of labor Tom Perez, and featuring remarks from Communication Workers of America president Larry Cohen, the event presented the issue of wage stagnation as the “core economic challenge of our time.”
The event coincided with the release of EPI’s exhaustive report of the same name, which argues that broad-based wage growth and addressing the disconnect between worker pay and worker productivity are essential to reversing the rise of income inequality, reducing poverty, and enhancing both social and economic mobility.
The three-decade period following World War II was a time when worker productivity and hourly compensation grew in tandem.
Between 1979 and 2013; however, EPI calculates that worker productivity continued to grow by nearly 65 percent, while worker wages essentially stagnated, growing just over 8 percent during that time.
Similarly, the Bureau of Labor Statistics found that hourly compensation has lagged behind labor productivity growth in recent years.
Public Policy Produced the Pay-Productivity Gap
Wage suppression has essentially been the public policy of the United States over the past thirty years, said EPI economist Elise Gould during a panel.
Flattened wages are not the result of a nebulous, invisible hand of the free market, but rather it is the product of deliberate public policy decisions that have reduced “the bargaining power of typical workers (individually and collectively), and [enhanced] the bargaining position of capital owners and corporate managers.”
Although globalization and enhancements in technology are often offered as causes of wage stagnation, EPI identifies the erosion of the inflation-adjusted value of the federal minimum wage and the decline in the share of unionized workers as additional drivers of weakened wage growth over the past thirty years.
The net result of flattened wages combined with exploding productivity is that corporate profit margins are at all-time highs, while the share of national income going to labor is approaching all-time lows.
“Reductions in wages and benefits explain the majority of the net improvement in [corporate] margins,” according to Michael Cembalest, the chief investment officer at J.P. Morgan Chase. Further, Cembalest asserts that “U.S. labor compensation is now at a 50-year low relative to both company sales and US GDP.”
The NBA Economy Mirrors the American Economy at Large
As the NBA’s free agency period begins in earnest this week, it is becoming increasingly well-known that the NBA’s economic model similarly suppresses the salaries of its employees.
Wage suppression in the NBA is accomplished through the collective bargaining agreement between players and owners, where the public policy of the NBA is forged. The suppression of player wages in the NBA parallels the suppression of worker wages in the economy at large.
The latest collective bargaining agreement was ratified in December of 2011, and emerged only after a lengthy lockout that lasted 149 days and forced the cancellation of twenty-six regular season games.
“This is about profitability. We’re going to make it profitable,” said then-commissioner David Stern during the 2011 lockout. The league achieved this goal by employing the same tactics that have worked so well for American corporations over the last several decades.
Just as “reductions in wages and benefits explain the majority of the net improvement in [corporate] margins” in the broader American economy, the NBA forced players to give up “$270 million—an average of $610,000 per player—to team owners.” This was achieved by reducing the players’ share of basketball-related income from 57 percent down to a range of 49–51 percent.
Aside from this cap on the percentage of league revenue dedicated to player salaries, additional constraints exist at both the team and individual levels.
The share of national income going to labor is approaching all-time lows.
As a result of these constraints, “the modern NBA superstar has his salary capped at a figure well below what he is actually worth to his franchise.”
NPR’s Planet Money examined the salary of Miami Heat forward LeBron James and found that he was underpaid at $17.5 million a year. Economists estimate that James “should be making closer to $40 million.”
Now a free agent, James—widely considered the best and most desired basketball employee on the planet—will not enter a free market where competitive bidding could potentially raise his salary closer to his actual value.
Instead, James is relegated to a market constrained by both team and individual caps that will continue to prevent him from earning a salary commensurate to the value he provides his employer.
Deadspin recently estimated the true market value of many NBA stars, and found the maximum salaries imposed by the collective bargaining agreement leave many players in James’ predicament.
These caps at both the team and individual levels serve to recreate the gap between worker pay and worker productivity that exists in the economy at large.
Just as Deadspin calculated the true market value of NBA stars, EPI has created a tool that projects what American workers would be earning had wages kept pace with productivity over the last several decades.
What Walmart and the NBA Have in Common
Interestingly, the NBA recognizes that it systematically underpays its most valuable employees. As written at ESPN.com:
That’s what the owners won in the lockout. The compromise they offered—not explicitly but with a wink and a nod—was that the money superstars were unable to realize in salary could be made up in endorsements later. In fact, the league encouraged and helped to facilitate those deals.
As indicated above, the NBA refuses to pay its top players what they’re worth, but will take steps to allow a third-party to fill part of the pay-productivity gap.
Where the salary maximums imposed by the collective bargaining agreement prevent Los Angeles Clippers point guard Chris Paul from being paid according to his production, for example, the NBA facilitates an endorsement deal with State Farm that allows Paul to make up the difference.
The NBA’s system of suppressing wages while allowing a third-party to make up the productivity gap rivals Walmart’s reliance on the federal government to subsidize poverty wages.
A single Walmart store in Wisconsin likely costs taxpayers “at least $904,542 per year and could cost taxpayers up to $1,744,590.” Though Walmart can afford to give its workers a raise, Walmart’s business model relies on tightly controlled labor costs and low wages that force many of its employees onto public assistance.
While some may find any comparison between professional athletes and Walmart workers absurd on its face, the exercise is instructive in illustrating the mechanisms used to suppress wages, create gaps between pay and productivity, and show how these gaps are addressed.
In each scenario, the principal employer passes to a third party the labor costs that should be borne by the principal itself.
Walmart relies on the federal government to provide its employees enough money for adequate food, housing, and health care, and “with a wink and a nod,” the NBA relies on corporate sponsors to help its employees realize the true value of their productivity.
By shirking the cost of their respective labor pools, both the NBA and Walmart provide examples of how the gap between worker pay and worker productivity is perpetuated throughout the American economy.
Circumscribed Share Versus Free Market Outcome
Comparatively, no such constraints exist for league owners as they negotiate the sale of their teams.
The sale of the Clippers demonstrates a true free market at work. While Forbes valued the Clippers as being the NBA’s thirteenth most valuable franchise at $575 million, owner Shelley Sterling (wife of Donald Sterling) sought $2 billion for the team in May, found a willing buyer in former Microsoft CEO Steve Ballmer, and executed the transaction.
By way of unrestricted competition between potential buyers, free from the kind of constraints that restrict player wages, Sterling was able to fetch a record price for her franchise that far exceeded even the most generous estimates of its value.
The consequences of statutory constraints on player earnings are palpable. After learning about the record eight-year, $248 million extension signed by Detroit Tigers first baseman Miguel Cabrera, James spoke wistfully of the free market framework within which Cabrera could sell his services, a framework forcefully defended over the years by the Major League Baseball Players Association.
“He’s the best player in baseball, and the best players in each sport should be rewarded,” James said. “It’d be nice to sign a 10-year deal worth $300 million.”
Given the recent purchase price for the Clippers, and the undeniable value that James would add to any franchise, it is probable that unrestrained competition among the NBA’s thirty teams would indeed allow James to find a team willing to employ him under those terms.
Photo credits: Getty Images