Diamond-Water Paradox

The diamond water paradox is a classic example of the numerous paradoxes that can be seen in everyday life. According to the diamond water paradox, the cost of diamonds is more than the cost of water despite the fact that water is essential for human existence while diamond is more of an optional luxury item. A good application of this paradox is the difference in the wages of essential employees like teachers and firefighters as against that of the sporting athletes. While the salaries of teachers, firefighters, policemen and other essential services workers are low, those that of the professional athletes is high. So, what is the reason behind this discrepancy? The analysis below will throw more light on this difference.

Wage determination

The first step to understanding the paradoxes that exist in salaries is to understand how wages are determined. Many factors are taken into account while determining the wage among different professions. One factor is the amount of risk that is taken by a person in fulfilling his or her responsibilities on the job and in general, the higher risk a person takes, the higher will be the salary. The second factor is the difference in the level of skills between individuals. The person who has higher skills will be paid higher because he or she is better equipped to perform a job satisfactorily and also the demand for skilled workers is likely to increase over a period of time when compared to that of unskilled workers. The third factor is the difference in revenue creation. When an individual can generate more revenue for the firm, then he or she will get paid more. Finally, external factors like trade unions can determine how much a person is likely to get paid. All these factors play a vital role in determining how much wage a person earns for the work that he or she performs.

Difference in the salaries between teachers and athletes

Based on the above understanding of wage determination, we can identify the reasons for the huge difference in the salaries between teachers and athletes. As mentioned above, the amount of revenue that is generated to the firm is a major factor in determining the salary levels. The athletes generate more money for their franchise by way of ticket sales, merchandise goods and telecast rights. Sports is a popular entertainment that is watched by millions of people around the world. When translated in economic terms, this means more money for the franchise company and so the athletes get more money because of the role they play in helping the company to get more revenue.

Another factor is the marginal utility of value. As in the diamond water paradox, water is less expensive than diamonds because they are readily available and an additional unit of water adds little value to the individual. On the other hand, diamonds are scarce and every additional unit adds substantial value and this is the reason it costs more than water. The same is the reason for the disparity in salaries between teachers and athletes. While teachers are available in abundance like water, athletes are rare and so they are considered to be a precious commodity like diamonds and this scarcity is the reason they are paid such enormous amounts of money each year.

Rising salaries of athletes

The salaries of athletes have seen a marked increase from year to year. The highest earning player in the Major League Basketball is Alex Rodriguez and he earns a whopping $32 million each year (USA Today, 2011). Other players in baseball, basketball, hockey and football typically earn in millions when compared to the paltry $50,000 a year earned by teachers. The Bureau of Labor Statistics (2011) estimates that the number of professional athletes in 2008 was 16,500 and this profession has one of the highest growth rates in the next decade. It estimates that by 2018, there will be 18,400 athletes and a growth rate of 12%. However, this number is still way less than the number of qualified teachers in America today and this means that the athletes salaries’ are not going to come down anytime in the future.

The huge salaries of athletes and the cost of tickets and sports merchandise go hand in hand. When a player can generate more money for the company by way of ticket sales and merchandise, then his or her value rises and so does the salary. Conversely, ticket prices are going higher because the franchise has to get more money to pay these huge salaries to players. In other words, it is the fans who pay these salaries to the athletes indirectly for the entertainment that they provide in the form of sporting games.

Hiring practices of sports teams

The hiring practice of professional sports teams have to be regulated because of the huge money involved. A player should be hired only because of his or her talent and no other factor should be considered. The professional bodies like NBA, NFL and MLB are already doing a good job of monitoring the hiring practices of different teams, but still teams have a lot more independence when it comes to determining the salaries paid to athletes. Specifically, the MLB does not put any cap on the salary paid to the players and more regulation is required in this area.

Conclusion

In short, it can be said that the salaries between teachers and athletes are based on the diamond water paradox. The abundance of teachers and the scarcity of top athletes and the subsequent marginal value they add to the society is the primary reason for this difference.

References

McLaughlin, Dan. (July 11, 2007). Rich Athletes, Poor Teachers. Mises Daily. Retrieved from: http://mises.org/daily/2626

Bureau of Labor Statistics. (2011). Occupational Outlook Handbook 2010-2011 Edition. Retrieved from: http://www.bls.gov/oco/ocos251.htm

USA Today. (2011). Major League Baseball salaries. Retrieved from: http://content.usatoday.com/sportsdata/baseball/mlb/salaries/player/top-25