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Testing Fair Wage Theory

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Abstract

Fairness considerations often are invoked to explain wage differences that appear unrelated to worker characteristics or job conditions, but non-experimental tests of fair wage models are rare because market data rarely permit researchers to measure individual workers’ productivity and its value. We use data from the baseball labor market to address this problem, and find no support for fair wage theory. We do find, however, that fairness premia can be illusory: Wages appear to incorporate fairness premia in regressions that control for variation in individuals’ physical output, but such premia evaporate when the value of that output is held constant.

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Notes

  1. In 1995, for example, locally-generated revenue (i.e., total revenue less receipts doled out equally to all clubs, such as national television rights fees) in the richest market exceeded that in the poorest by a ratio of 5.5:1. By 2001, that ratio was 22.3:1 (Levin et al. 2000, 2001).

  2. Though it should be noted that if employers behave “irrationally”—if, e.g., they are willing to “pay any price to win”—and do not limit their wage offers to players’ MRPs in their market, the structure of wages may be markedly different from that described in the foregoing analysis.

  3. It is not uncommon, however, for players to sacrifice some monetary income to play in markets pleasing to them for other reasons, e.g., proximity to their hometowns.

  4. Of course, ten players may contribute at one time in the American League, thanks to that league’s Designated Hitter rule.

  5. It should be noted also that Coasian sales of high-quality, low-seniority players from small- to large-market teams are prohibited by the sport’s Commissioner in order to “preserve competitive balance.”

  6. An alternative approach suggested by the fairness literature would compare wages to firm profits, but measures of profits are notoriously unreliable in major league baseball, where, for a variety of reasons, team owners have a strong incentive to appear unprofitable (see e.g., Fort 2003, p. 117).

  7. As it turns out, our results are identical to OLS because there was not a single sophomore player who was paid exactly the minimum salary. This indicates that while teams hold considerable monopsony power over pre-arbitration-eligible players, they either (a) bump wages above the minimum for fairness reasons or (b) pay players a share of their MRP as a result of bargaining by the players or their agents. Results for Eqs. 6 and 7 suggest the latter explanation.

  8. James is a founding father of the field of “sabermetrics,” or the application of statistical methods to the study of baseball. His tools for evaluating player productivity are widely used by researchers, journalists, and teams themselves. The central virtue of the Win Shares measure is that it ignores no element of player performance that affects team success; that is also its main vice, since scores of formulae and hundreds of parameters are required to generate an accurate summary productivity measure. Clearly, however, it is far more accurate than the approximations sometimes used in the sports economics literature (see, e.g., Scully 1974).

  9. See Griffiths et al. (1993, p. 435).

  10. Results from regressions on the natural log of salary follow the same pattern of the results reported in Table 3.

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Acknowledgments

The authors thank Matthew H. Walters for his capable research assistance, and Patricia Anderson, Dave Berri, Bob Moffitt, Steve Levitt, Charles Scott, Norman Sedgley, anonymous referees, and participants in the WEA International sessions in sports economics for helpful comments on earlier drafts. Of course, any remaining errors are our own. The research was supported by the Loyola College Summer Research Grant Program.

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  1. Department of Economics, Loyola College in Maryland, 4501 North Charles Street, Baltimore, MD, 21210, USA

    John D. Burger & Stephen J. K. Walters

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Correspondence to John D. Burger.

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Burger, J.D., Walters, S.J.K. Testing Fair Wage Theory. J Labor Res 29, 318–332 (2008). https://doi.org/10.1007/s12122-007-9044-8

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