According to many NBA draft “experts,” Andrew Wiggins and Joel Embiid are two of the top prospects in the 2014 NBA draft. Next year, assuming each player is indeed taken in the top five, they will earn more than $3 million to play basketball. This will be quite a pay raise for both players.
During this past season—when both players worked for the University of Kansas—each was paid considerably less. According to estimates offered by USA Today back in 2011, a student-athlete receives about $120,000 in value each year, or $125,250 in 2014 dollars. This calculation includes such factors as a scholarship, health care, coaching, and media exposure. Although economist Andrew Zimbalist called this calculation “wrongheaded” (and yes, there are some real problems with how USA Today did it), let’s treat it as a very high estimate of the upper-bound of “student-athlete” pay.
Let's accept that number. Is that what Wiggins and Embiid were worth in 2013-14? To answer this question, we need to figure out each player’s economic value. Back in 1974, economist Gerald Scully devised a simple method to measure an athlete’s economic contribution to a team. First, one determines how much revenue each win is worth to an organization. And then, one measures how many wins each player produces. Multiplying the wins a player produces by the value of those wins gives us an estimate of the player’s value to his employer.
To illustrate, prior to the NCAA Men’s Basketball Tournament, Embiid had produced 4.67 wins for the Kansas Jayhawks (calculated essentially according this approach used for the NBA). Using college revenue data from the U.S. Department of Education, economist Robert Brown (for research Brown, I, and a few others are working on) estimated that one win for the Kansas men’s basketball team was worth $159,601 in 2010-11 ($166,585 in 2014 dollars). Given these two numbers, Embiid was worth approximately $777,286 (again, prior to the tournament). If we take the USA Today number seriously, this means the Jayhawks have underpaid Embiid by a bit more than $650,000.
Repeating the same calculation for every player on the Jayhawks, we see, as the following table illustrates, that Andrew Wiggins (who some people think is worth the number one pick in the NBA draft) was only the fourth most productive Jayhawk this year. Even though Wiggins has underperformed relative to expectations, he has still been underpaid by more than $450,000. And combined, this entire team has been underpaid by about $2 million.
Now let’s imagine for a moment that the Kansas Jayhawks hired this talent in a competitive labor market. In such a market, a firm underpaying their employees would face a problem. If a worker like Embiid generates more than $700,000 in revenue and is paid less than $200,000, another firm would be more than happy to pay more.
But in the NCAA, this option doesn’t exist. Paying more money is a violation of NCAA rules. If a school violates these rules it will first face penalties, and, as Southern Methodist discovered in 1987, can actually be prohibited from playing. Such a prohibition reduces the revenue of the program to zero, hence making the practice of paying players more money a very bad deal.