What Can We Learn from Sports?

     Professional sports teams are businesses.  They live in a
different world than most businesses. Thus, they behave
differently.  Still, the sports world isn't as different as some
might imagine.

     Teams pay hundreds of millions of dollars to hire one
player.  Teams furiously compete to hire the best players.  Why
don't teams hire more cheaper players, rather than a few
expensive ones?  The answer is simple.  The teams are limited
by the rules as to the number of players they can hire and use at
anyone time.  Hiring two cheaper players usually isn't the
equivalent of hiring one of the best.

     A weak team may benefit more by hiring the two weaker
players.  This may make the team stronger, but it will still be
weaker than the best teams.   For good teams to improve they
must hire the best, no matter what it costs.  There is little
demand in the Major Leagues for less productive players.  They
must seek other ways to earn their living.

     In the world of business the market for CEOs is much
like the market for star athletes.  A company has only one CEO. 
It can't get the same result by hiring two or three CEOs with
lesser ability.    To be successful the company must hire the
best, even if it costs a bundle.

     Thus, the market for CEOs is much like the market for
star athletes.  And, not surprisingly, the compensation for
CEOs rivals the compensation paid star athletes.

     Fortunately, in most areas businesses aren't limited to
hiring one or a few employees.  The business can hire as many
employees as it needs to do the job.  The productivity of a
second or third employee is in addition to, not in place of, the
productivity of the first employee.

     When making hiring plans businesses compare total cost
of the employees to the total value of what the employees will
produce.  The costs of an employee include all of the costs for
equipment, material and supplies the employee will use to be
productive.  Hiring 10 employees may achieve the same
production as the hiring of seven more productive employees.

     Will the business hire the 10 or the seven?  That depends
on which will cost the most.  If the cost of the 10 is less than
the cost of the seven, the business will benefit by hiring the ten. 
In free markets less productive workers can compete with more
productive workers by accepting lower pay.  Everyone wants
higher pay.  Please note that lower pay is more than the no pay
alternative of unemployment.

     We will now consider a few of the ways we have tilted
the playing field against the less productive workers.  Prevailing
wage laws are one of the most obvious.  These laws include the
1930 Davis-Bacon Act that requires government contractors to
paying the so called prevailing wage to employees.  The
"prevailing wage" is usually interpreted to mean the union wage.

     Such laws push wages higher for the more productive
workers while keeping the less productive workers unemployed
or in lower paying jobs.  Employers hire the seven, not the 10. 
This wasn't an unintended consequence.  Supporters of the law
claimed it would protect high paid, "deserving" white workers
from competition from low skilled black workers.  The law
worked.  The mere fact a law works doesn't make it desirable or
good.

     All minimum wage laws, whether called minimum wage
laws, living wage laws or something else, have the same effect. 
Some early advocates of these laws openly stated the purpose of
the laws was to keep women and "undesirables" from competing
with "deserving" men for jobs.  Union wages also discriminate
against the 10 and favor the seven.

     This great morass of wage laws pushes up the wages paid
to the most productive while dooming the less productive to
unemployment.  Average wages may go up.  Average income
goes down.  The beneficiaries of the higher wages pay more
taxes to support the unemployed.  Who wins this game?

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Copyright 2012
Albert D. McCallum
18440 29-1/2 Mile Road
Springport, Michigan 49284