Abstract
The purpose of this inquiry is to utilize a natural experiment from professional basketball to examine how wage inequality impacts the productivity of the firm. The literature suggests that wage inequality may promote firm productivity if higher wages are necessary to limit the damage potential of certain workers. In contrast, other writers have trumpeted the productivity gains from worker cooperation and thus, argued that wage disparity lowers firm output. During the 1990s, the National Basketball Association experienced dramatic increases in the level of wage inequality. The empirical evidence reported here supports a third possibility. Specifically, wage inequality and firm productivity are not related.
Similar content being viewed by others
References
Akerlof, G. A.; Yellen, J. L. “The Fair Wage/Effort Hypothesis and Unemployment,”Quarterly Journal of Economics, 105, 2, May 1990, pp. 255–83.
Akerlof, G. A.; Yellen, J. L. “Fairness and Unemployment,”American Economic Review, 78, 2, May 1988, pp. 44–9.
Banaian, King; Gallagher, Dan. “When a Cap is not a Cap: Player Mobility and Pay in the NBA,” mimeo.
Bender, Patricia.Patricia's Various Basketball Stuff, Online, Available: http://www.dfw.net/~patricia.
Berri, David J. “Who is Most Valuable? Measuring the Player's Production of Wins in the National Basketball Association,”Managerial and Decision Economics, 20, 8, Fall 1999, pp. 411–27.
Berri, David J.; Schmidt, Martin B.; Brook, Stacey L. “Stars At The Gate: The Impact of Star Power on NBA Gate Revenues,”Journal of Sports Economics, 5, 1, February 2004, pp. 33–50.
Blass, Asher A. “Does the Baseball Labor Market Contradict the Human Capital Model of Investment?”The Review of Economics and Statistics, 74, 2, May 1992, pp. 261–68.
Carter, Craig; Reheuser, Rob, editors.The Sporting News: Official NBA Guide 2002–03. Saint Louis, Missouri: The Sporting News Publishing Company.
Depken, Craig A. “Wage Disparity and Team Productivity: Evidence from Major League Baseball,”Economic Letters, 67, 1, April 2000, pp. 87–92.
Ehrenberg, R. G.; Bognanno, M. L. “The Incentive Effects of Tournaments Revisited,”Industrial and Labor Relations Review, 43, 3, February 1990, pp. S74–88.
——. “Do Tournaments Have Incentive Effects?”Journal of Political Economy, 98, 6, December 1990, pp. 1307–24.
Ericksson, Tor. “Executive Compensation and Tournament Theory: Empirical Tests on Danish Data,”Journal of Labor Economics, 17, 2, April 1999, pp. 262–80.
Fuess, Scott M. “Paying Professional Baseball Players: Tournament Pay for Teamwork,” mimeo, Presented at the Western Social Science Association meetings, 1998.
Hill, J. Richard; Groothuis, Peter A. “The New NBA Collective Bargaining Agreement, the Median Voter Model, and a Robin Hood Rent Redistribution,”Journal of Sports Economics, 2, 2, May 2001, pp. 131–144.
Kahane, Leo H.; Shmanske, Stephen. “Team Roster Turnover and Attendance in Major League Baseball,”Applied Economics, 29, 4, April 1997, pp. 425–31.
Kahn, Lawrence M. “Managerial Quality, Team Success, and Individual Player Performance in Major League Baseball,”Industrial and Labor Relations Review, 46, 3, April 1993, pp. 531–47.
Knoeber, Charles R.; Thurman, Walter N. “Testing the Theory of Tournaments: An Empirical Analysis of Boiler Production,”Journal of Labor Economics, 12, 2, April 1994, pp. 155–79.
Lazear, Edward P. “Labor Economics and the Psychology of Organizations,”Journal of Economic Perspectives, 5, 2, Spring 1991, pp. 89–110.
Lazear, Edward P. “Pay Equality and Industrial Politics,”Journal of Political Economy, 97, 3, June 1989, pp. 561–80.
Lazear, Edward P.; Rosen, Sherwin. “Rank-Order Tournaments as Optimum Labor Contracts,”Journal of Political Economy, 89, 5, October 1981, pp. 841–64.
Levine, David I. “Cohesiveness, Productivity, and Wage Dispersion,”Journal of Economic Behavior and Organization, 15, 2, March 1991, pp. 237–55.
Lynch, James G.; Zax, Jeffrey S. “The Reward to Running: Prize Structure and Performance in Professional Road Racing,”Journal of Sports Economics, 1, 4, November 2000, pp. 323–40.
Main, Brian G. M.; O'ReillyIII, Charles A.; Wade, James. “Top Executive Pay: Tournament or Teamwork?”Journal of Labor Economics, 11, 4, October 1993, pp. 606–28.
Maloney, Michael T.; McCormick, Robert E. “The Response to Workers to Wages in Tournaments,”Journal of Sports Economics, 1, 2; May 2000, pp. 99–123.
Milgrom, Paul; Roberts, John. “An Economic Approach to Influence Activities in Organizations,”American Journal of Sociology, 94, 1988, Supplement: S154-S179.
Orszag, Jonathan, M. “A New Look at Incentive Effects and Golf Tournaments,”Economic Letters, 46, 1, September 1994, pp. 77–88.
Ramaswamy R.; Rowthorn, R. E. “Efficiency Wage and Wage Dispersion,”Economica, 58, 232, November 1991, pp. 501–14.
Rosen, Sherwin. “Prizes and Incentives in Elimination Tournaments,”American Economic Review, 76, 4, September 1986, pp. 701–15.
Sommers, Paul M. “Work Incentives and Salary Distributions in the National Hockey League,”Atlantic Economic Journal, 26, 1, March 1998, p. 119.
Author information
Authors and Affiliations
Rights and permissions
About this article
Cite this article
Berri, D.J., Jewell, R.T. Wage inequality and firm performance: Professional basketball's natural experiment. Atlantic Economic Journal 32, 130–139 (2004). https://doi.org/10.1007/BF02298830
Issue Date:
DOI: https://doi.org/10.1007/BF02298830