Income inequality explained: A sports tutorial from the NBA

By Aaron Rice
March 5, 2020

Income inequality is a hot topic in theoretical economics and an even hotter topic in the theater that is American politics.

If you “feel the Bern” or if you tune in to any debate, the rich getting richer and the common man getting screwed is a continuous drumbeat. So short of having a PhD in economics or a master’s degree in finance, it’s easy for some to get suckered into resentment. Thankfully, we can turn to the world of sports to provide a contextual overview of income inequality.

In 1975, the Hall of Famer Kareem Abdul Jabbar (formerly known as Lew Alcindor) was the highest-paid player in the NBA, earning a whopping $450,000. That’s a jaw-dropping $2.79 million in today’s dollars. Stated another way, the NBA’s all-time leading scorer, six-time MVP, and six-time world champion was making the equivalent of less than $3 million per year today.

That same year, the average NBA player earned $90,000, and the league minimum was $30,000 per year. How was the common man fairing at this time? U.S. median household income was $13,379, and a security guard working in a sports arena, making $3.50 per hour, was bringing in $7,280 annually.

In terms of income inequality and executive pay ratios, Kareem was making 5X the average salary of an NBA player and 15X the league minimum. In terms of the global issue of inequality, Jabbar was making almost 34X the national household income average and 62X the lowly arena security guard.

So how has the income landscape changed in the last 45 years in the NBA? And more importantly, why?

The highest-paid player in the NBA this year based on salary is Stephen Curry, a two-time MVP and three-time NBA world champion. Curry will make $40 million this year despite having played in only four games to this point because of injury. The ten highest-paid players in the NBA will earn a collective $371 million in salary, or an average of $37.1 million per player. The league average is $7 million, and the NBA minimum salary is $582,100. 

So interleague, how has the NBA fared? The top player’s ratio to the average salary is holding constant at about 5.5X the average, but the ratio to the minimum salary in this star-driven league has widened to an alarming 68X the league minimum.

Even more concerning are the NBA salaries in relation to the average U.S. household income, a.k.a. the common man, and also to the lowly security guard. Over the same 45-year period, the ratio of the top NBA salary to the average U.S. median household has risen from 34X to almost 630X. As concerns the top salary in relation to a lower-profile member in the same organization—the security guard—the ratio has surged to a staggering 2,900X in 2020, from 62X in 1975.

Income inequality is defined as an extreme disparity of income distributions with a high concentration of income usually in the hands of a small percentage of a population. Clearly, the NBA checks all the boxes.

So what are some of the root causes of the NBA’s inequality dilemma? In a star-driven league, there are only so many stars. How many human beings can shoot the 3-point shot like Steph Curry? In the history of the NBA, only one player has ever made a higher percentage. LeBron James, a 16-time All-Star, four-time MVP and three-time NBA champ, is an athletic freak of nature who could have played virtually any professional sport of his choosing. Giannis Antetokounmpo is among the rarest of athletic specimens in a league of extraordinary athletes. The subset of the population that is seven feet tall, runs the length of the court in three seconds, makes 55% of shots attempted and averages 30 points and 14 rebounds per game is a very tiny group of human beings—thus the nickname “The Greek Freak.”

Curry, James and Antetokounmpo demonstrate the concept of “hierarchies of competence.” In every discipline, exceptional contributors emerge. Such contributors create value and growth. While fortunate circumstance or chance may be a contributing factor, this is the exception and not the rule. Generally speaking, competency and timing combine. Bill Gates created the Windows Operating System as personal computers became standard issue. Mark Zuckerberg co-created Facebook (kind of) just as social media was taking hold of our phones. The NBA, with the players’ union, signed a massive new media rights deal as established networks and burgeoning new media entities like Facebook, Amazon and Netflix were breaking the bank in search of original scripted and non-scripted content for global consumers. 

A lot of this income “success” is a result of good old-fashioned hard work, discipline and dedication. To obtain this “hierarchy of competence,” players put in hours at the gym, work with strength coaches, endure physical therapy, employ shooting coaches, keenly focus on diet and rest, and sacrifice other endeavors in order to master their craft. They made it to top of the high school food chain, the college food chain and now the NBA food chain. In short, the NBA is a meritocracy. Natural selection is a force in their profession and in their income.

The NBA has an income inequality issue, and nobody is complaining about it—not the average veteran making $7 million, or the journeyman making that league minimum of $582,000, or even that arena security guard or die-hard NBA fan who gets an up-close-and-personal view of some truly great entertainment—because the NBA has created value that makes many of our lives just a little more enjoyable. So thanks, Bill Gates, for giving us unlimited knowledge and access at our fingertips, and thanks, Mark Zuckerberg, for keeping us informed about our high school reunions. And thank you, Warren Buffett; you have made a lot of shareholders, including us, a lot of money over your 70 years at Berkshire. Are we jealous of your obscene wealth? Sure, but you earned it. We have no reason to be resentful. It’s the same for the NBA.

A visionary commissioner, a global marketplace, a collaborative relationship between the union and owners, the fortunate advent of original content and sports gaming, and one quickly forgets the income inequality issue in the NBA. Instead, we focus on the expansive economic growth created for all. Rather than an obsession with the gap between the top and the bottom, we focus on what the NBA has done over the past 45 years, which is to create a lot more millionaires. 

This appeared in Forbes on March 5, 2020.


magnifiercross linkedin facebook pinterest youtube rss twitter instagram facebook-blank rss-blank linkedin-blank pinterest youtube twitter instagram