Academic journal article Journal of Economics and Economic Education Research

Wage Dispersion's Effectacross Team Units: Evidence from the National Football League (Nfl)

Academic journal article Journal of Economics and Economic Education Research

Wage Dispersion's Effectacross Team Units: Evidence from the National Football League (Nfl)

Article excerpt

(ProQuest: ... denotes formulae omitted.)

BACKGROUND

Wage dispersion (or wage inequality) refers to the variance of wages across a firm. Two competing theories examine the effect of this dispersion on the firm's success. One theory (tournament theory) proposes that the larger the disparity, the better the firm performs. This outcome results from lower-paid workers (behaving as if they are in a competition) striving to perform at the highest level in order to obtain a higher salary. This theory predicts a positive relationship between the level of dispersion and firm performance - higher dispersion leads to better performance. The other theory is based on cooperation and fairness (equity theory). This theory proposes that with greater pay inequity, the lower-paid workers, dissatisfied with their pay, refuse to cooperate and act to sabotage the firm's performance. As a result, equity theory predicts a negative relationship between dispersion and firm performance - higher dispersion leads to poor results for the firm.

Seminal research in wage dispersion has focused on firms (Lazear and Rosen, 1981; Lazear, 1989; Ramaswary and Rowthorn, 1991). Recently, wage dispersion has progressed into studying professional sports teams (Sommers, 1998; Depken, 2000; Frick, Prinz and Winkelman, 2003; Dole and Kassis, 2008, Borghesi, 2008). This work has produced mixed results. In some cases, a positive relationship has been found between wage dispersion and winning percentage in professional hockey and major league baseball. In other cases, no relationship or a negative relationship has been found in professional baseball and football. In one study, a negative relationship was found between wage inequality and team success in professional basketball.

This research presents a more refined approach to team structure to examine the lack of consensus in results. It should be noted that in basketball, hockey and baseball, offensive and defensive players are on the court (field) simultaneously, and they are the same players. In football, however, offensive and defensive squads are separate groups of players. Therefore, it would be more difficult for a low-paid defensive player to sabotage or act cooperatively with a running back. Because most previous research grouped offensive and defensive football players together, it is not surprising that a clear relationship between wage dispersion and team performance is hard to find.

Following Borghesi (2008) and noting this difference between other professional sports and the National Football League (NFL), this paper divides NFL teams between offensive and defensive squads. Next, the degree of wage dispersion for each squad is computed and then compared to its (the squad's) performance using a panel data approach. Offensive performance is judged on "points scored" and "total yards gained" while defensive performance is based on "points allowed" and "total yards allowed". Results show support for the tournament theory on both sides of the ball. An increase in wage dispersion leads to more touchdowns scored and more yards gained. And for the defensive side of the ball, an increase in wage dispersion leads to fewer touchdowns allowed and fewer total points allowed.

In addition, offensive and defensive performance can also be judged based on efficiency in scoring. Once a team moves inside its opponent's 20-yard line, it's considered to be in the "red zone". This paper actually broadens this measure of the red zone and looks at the scoring of touchdowns as a percent of all scoring. A team is considered more successful when these trips result in touchdowns, not settling for a field goal. Likewise on the defensive side of the ball, can the more cohesive squad force the opponent into a field goal and not allow a touchdown?

The remainder of this paper presents a literature review, a description of the data and then the methodology. Results with conclusions close the paper.

LITERATURE REVIEW

The fairness of wages has been examined in a variety of frameworks starting as early as Adam's (1963) equity approach and the psychological impact on worker behavior. …

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