Integrated test for exploitation and discrimination in the National Basketball Association

Over the past thirty years, economists have become increasingly interested in the labor market for professional sports. These studies have focused primarily on exploitation, the difference between marginal revenue product and salary, or discrimination, salary differentials based on race, or ethnic background. This paper attempts to combine both areas of research. that is, to explain the systematic deviation of marginal revenue product from salary as a function of race, or ethnic background. Using NBA data collected over three seasons 1995-98, we specify a three-equation model. an enhancement of the Scully two-step method presented in 1976. We then ask if players are paid a salary equal to the revenue they generate. and if not. can the resulting differential be explained using a dummy variable for race and ethnic background. INTRODUCTION Previous studies on the labor market for professional sports have focused on exploitation and/or discrimination separately. Few efforts have been made to test for both simultaneously. This paper does just that. The model presented here attempts to explain the systematic deviation of NBA players' salaries from their marginal revenue products as a function of race or ethnic background. Who cares? Economists have become increasingly interested in the labor market for professional sports. This arena provides an advantage over traditional labor studies, since more extensive, publicly kept measures of productivity are available. Even more enticing perhaps is the chance to shed light on a topic surrounded by misconceptions and controversy. The public as a whole tends to think that professional sports are perhaps the perfect equal economic employer, rewarding players on merit alone. This misconception is logical since the ratio of minority players to white players is greater than that same ratio for the labor force as a whole. Second, many of the.highest paid athletes are black. For example in 1995, eighty percent of NBA players and thirteen of the highest paid players where black. In general, the salaryof athletes has been a controversial topic. For example, in the mid to late 90s, journalists and sports writers questioned whether college athletes should be compensated for the revenue they generated. The underlying theory behind the model estimated is if the NBA is a perfectly competitive market, players should be paid a salaryequal to their productivity. This implies that athletes should be paid a salary equal to their marginal revenue product, a salary equal to the amount of revenue they generate. If they are not paid as much, are they being exploited? In the NBA however it is