ThomasGoodwin.com

Call me a skeptic. As much as I want to believe that the free market economy is efficient, evidence continually presents itself to say just the contrary. Don’t get me wrong, I’m not a socialist by any means and I don’t feel oppressed. Nor do I feel like there is some kind of conspiracy against the middle class or those working in poverty. In fact, maybe I am too naive in thinking just the opposite - that you can still get ahead in America by working hard and continually trying to improve your skill set through additional education.

So, you ask, what evidence am I referring to that the free market system isn’t efficient? Let’s look at high profile jobs in sports and their respective pay. Recently there was an article in the USA Today newspaper (November 16, 2006, page A15) about the dramatic increase in the number of college football coaches who make more than $1 million per year in salary. The article of course pointed out how this number was dramatically higher than last year or years past and increasing each year. It went on to describe how these coaches make more money than the very presidents of the universities where they work. Imagine… making more money than the CEO of your company!

My question is this: if economics holds true, that in the free market the wage paid will be determined on the supply and demand of labor, why is there such a dramatic rise in college football coaching salaries?! I mean, there is certainly no shortage of qualified candidates who would kill to coach a college football team. In fact, I bet most high school coaches, college assistant coaches, even NFL level assistant coaches would salivate at the very thought of getting the head coaching job of any given college. I’m sure if you were the president of the University of Texas in Austin you could put an ad in the newspaper with something to the effect “Wanted: Head Football Coach” and without writing one more word you would be flooded with resumes, emails, and phone calls. The reason is that this is such a high profile job that there are qualified candidates that will apply regardless of the amount the university is willing to pay.

So why does a university like Iowa pay its coach $4 million plus perks? Think of all the qualified candidates that would be willing to work for half that amount! And half is still a hefty seven figure salary! You could take half of what Iowa pays its football coach and then take 10% of THAT! Yes, I still think you would be able to find a well-qualified coach for a $200,000 salary.

If the college brings every qualified candidate into a room and says, “one of you will be hired today but the job will go to the lowest bidder”, the college could essentially pit each candidate against one another and the college would get a qualified candidate for the lowest nominal cost to the institution.

If you’re nodding your head saying “yeah, this makes sense”, then you just applied the concept of a silent auction to the labor market. Similar to websites like lendingtree.com or such where consumers go out and name the product or service they are looking for and vendors pitch them what they have to offer and their terms, i.e. price. In the silent auction, the bid gets driven up as buyers often over bid/over pay to ensure that their bid will win. In our particular case, the bid is driven down to determine the lowest salary that a candidate is willing to accept in return for the coaching responsibility.

So, as someone who cringes when colleges announce tuition increases, this sounds like a great way to drive down the cost of higher education, right?! Oh, wait. There’s a major problem with doing this. If we can do this with a coach’s salary, couldn’t we do this with your job as well? I mean, if you work as an accountant and you were looking for a job with a Big 3 accounting firm, you would probably be willing to work for a little less than if Joe Schmoe CPA firm called and wanted to hire you. Why? Because the growth opportunity and the name recognition of the bigger firms carry some value, much like Coca Cola has brand name recognition compared to a store brand cola.

Or take it down yet another step. If you work as a minimum wage farm worker there are some illegal migrant/immigrant unskilled laborers that are willing to work for less than you.

So therein lies the economic question. What is the fair price of labor? Why are we willing to pay someone an exorbitant amount to work a high profile, highly sought after job that someone would do for much less? Conversely, why do we pay someone so little for a job that no one wants to do (to the point that some people will sneak into the country illegally and do for much less)? Similarly, why do we implement laws to establish minimum wages to prevent basic, unskilled jobs from losing their economic value to society?

As always, your thoughts are welcome and encouraged…

This entry was posted on Wednesday, May 30th, 2007 at 11:15 pm and is filed under Economics/Social Issues. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.