Pay to Play: Economic Impact of Paying College Athletes
1. Purpose of Research & Analysis On April 25, 2014, the National Labor Relations Board in Washington, D.C., granted Northwestern University's request to review the decision made by the regional office recognizing the school's football players as employees. In mid-April, Northwestern football players voted as a team on whether or not to unionize, but the votes will only be opened if the board ends up siding with the players, which may take at least a couple of months. Ultimately, the Northwestern football players are determining their fate through this secret ballot and their decision to form the first union amongst college athletes—a decision that has the ability to change the landscape of American college sports. If granted the right to unionize, the Northwestern football team will actually have the ability to bargain over their conditions and it is expected that this could ultimately lead to requesting salary compensation for their efforts. In light of these recent historic discussions, it is critical to analyze not only the ethical, but also the economic impact of such potential situations. My research paper has been structured to shed some light into the challenging and complicated discussions that continue to occur around this topic. Specifically, I have broken my research and analysis into three key topics. First, I explore whether or not there is an underlying issue with the current state, from an economic perspective. Specifically, I answer various questions around whether or not there are economic impacts currently or projected in the future, with not paying college athletes. Before diving into the specifics of this topic, it is critical to determine if there is an actual problem and if there is, define the underlying issues leading to the concern. Additionally, this portion of my research discusses the effect of this “problem” on various groups

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of people. Players, coaches, university leadership, and fans are all various stakeholders that would ultimately be affected by this topic and the potential future policy changes. Second, I explore the varying opinions of multiple stakeholders involved in this debate to help understand which groups feel college athletes should be paid and which don’t. Additionally, understanding why each group feels the way that they do and the benefits that they foresee reaping from whatever decision ends up being made. Lastly, this point of research incorporates the economic effects of both decisions on each of the various stakeholder groups. Finally, this paper incorporates recent discussions surround Northwestern University and their football team. Specifically, I have addressed the relationship to and impacts of unionizing and how this will ultimately impact the overall policy changes and decisions. The results of this section of analysis have helped to determine what aspects of unionizing—from an economic perspective—impact salary for student athletes. The remainder of my research and analysis described below was focused on analyzing the costs and benefits of the following various considerations:      Do you pay all student athletes equally? Is that equitable? How will walk-ons vs. recruited vs. scholarship athletes be handled? Do you pay all of those student athletes or only those that make an impact? How does Title IX apply to pay for student athletes? Are all sports included in policy? Or only sports that bring in a certain amount of revenue for the university? 2. Situation Overview, Background, and Current Thinking Over the last few decades, primarily within the last few years, there have been recurring discussions as to whether or not college athletes should be paid in return for their work to generate money for their specific university. This debate has recently moved to the forefront of

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athletic discussions as a government official recently ruled that the Northwestern University football players are “employees of the university” and not just student-athletes. With that, the government official essentially granted the Northwestern football players the right to unionize and ultimately bargain over their “working” conditions just as a typical employee could. While Northwestern may recently be the headliner in this discussion, the debate definitely doesn’t end there. The debate as to whether or not college athletes should be paid is not just two sided. Individuals’ opinions vary across the spectrum and range from all college athletes should be paid, to only football and basketball players, to none at all. Each view raises various questions, concerns, and additional discussion as there seems to be no easy and/or perfectly correct answer. Some people believe that if teams continue to be unionized as Northwestern was, then student athletes will ultimately always want to be paid, which has the potential to change college sports indefinitely. The final decision around this topic will ultimately fall with the judicial system and will most likely only consider a small portion of the economic concerns. Regardless, it is important to analyze and consider all sides, particularly with regards to the economic constraints and impacts. Two critical examples are included below outlining discussion points that continue to arise around this topic and must be analyzed prior to reaching a conclusion. First, only certain sports within the college athletics arena actually bring in money for the associated universities. Football and basketball are the two major sports that generate significant revenue for colleges. To add another level of complexity to this issue, it is really only men’s basketball that brings in a generous amount of proceeds. Various questions and concerns—both ethical and economical—arise from this point. Should all college athletes be paid or only those on teams that are actually generating profit? If the latter, how will it be received that only male athletes have the opportunity to be paid, while females still will not. Instead, if all college

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athletes are paid, the money will still primarily come from football and men’s basketball. Does it make economic sense to still financially reward the other student athletes even if they aren’t generating any major return on investment? Second, many (if not the majority of) college athletes—while not technically paid—do currently receive compensation for their efforts. College athletes are rewarded through scholarship funding, which is valued at a very high price. To use Northwestern as an example, a full football or basketball scholarship could be worth nearly $250,000 across the four years. In addition to just covering the costs of tuition, many football and male basketball players also receive a stipend to cover costs of living—housing, food, books, and even medical care. Still, it’s not all that surprising that a football or basketball player feels they deserve to be paid for their efforts. They are well aware of the revenue that they are generating for their particular school and while they are receiving financial aid, the amount may not be anywhere near what they believe they deserve. They are well aware of the salary that the athletic coaches are making and have a general understanding of how much profit the university is turning. With that, it is a simple calculation for them to determine how much they really should receive on an annual basis. 3. Detailed Analysis (Facts & Data) The remainder of my research paper is focused on outlining the analysis of multiple viewpoints around this topic. Additionally, I have described in detail, the process and results of my economic analysis. Using these results—as well as my own personal experience and opinion—I conclude my research discussion with personal recommendations on how the issue can be most appropriately addressed and mitigated. Is there a problem? What is the problem?

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The problem behind this topic is two-fold and consists of two conflicting perspectives. On one hand, student athletes are already paid, which I will prove through my analysis and justification below. On the other hand, however, student athletes may not believe that the compensation they are receiving is really enough based on the amount of revenue they are bringing in for their associated college or university. The true problem lies in diminishing that perspective by demonstrating that college athletes are in fact already compensated, even if they aren’t receiving an actual paycheck. Today, student athletes commonly are rewarded with athletic scholarships, which essentially pay for tuition, room, meal plans, and even books and miscellaneous expenses. At bigger universities and the more successful athletic programs, such as Northwestern, it would not be uncommon for student athletes to also receive free academic counseling, tutoring, counseling, and even medical care or even a personal nutritionist. While not all student athletes are in fact receiving financial support from their university, it is fair to assume that those contributing to the university’s revenue are in fact being compensated in the form of educational benefits, tuition costs, and living expenses. From an economic perspective, these revenue generating athletes are receiving “pay.” In addition to the more obvious benefits described above, student athletes are receiving additional support and forms of compensation that are often overlooked. For example, college athletes are receiving professional coaching and training from top-notch coaching, as well as personalized strength and fitness programs from highly qualified trainers. Additionally, they are receiving personal care and rehab from physical therapists. All of these benefits are allowing them and preparing them for the next level, whether it be the NFL or NBA. These added services would cost an average person somewhere between $2000 and $3000 per week. Using this

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approximate estimate, and adding the additional benefits already described, a student athlete (on a team that is considered a revenue-generating sport) at a major university is likely receiving a compensation package of nearly $100,000 - $175,000 a year. For example, a northwestern football player’s compensation package would look similar to the below estimate. The exact estimate is dependent upon the sport played, as well as whether the university is private or public. Service Received Tuition Costs (per year) Student Fees Room & Board Books & School Supplies Personal Expenses Coaching, Training, Therapy (52 weeks/year at $2,000 per week) Notional Total Estimated Cost $46,836 $415 $14,389 $1,914 $1,965 $104,000 $169,519

The compensation package outlined above doesn’t take into consideration the added benefit that the best college athletes gain from the publicity and fame. Professional sports teams evaluate and recruit potential talent using statistics from college careers and taking and advice from college coaches that they know and trust. College coaches want their athletes to play for the best professional team possible and devote a lot of their personal time to ensuring that this happens. Because of that, college athletes dramatically increase their changes to be recruited by a professional team upon graduation as college coaches mitigate any uncertainty a professional coach or recruiter has about an athlete. Recruiters from professional teams take the word of college coaches very seriously, which often times leads to negotiation of a more attractive contract and even signing bonus. While this added value may only be true for the very best of college athletes (primarily male), but it is still worth the discussion and inclusion in the overall
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compensation package. For some students, this added publicity and assistance from their coaches carries the most significant economic value—even beyond that of the tuition assistance. It is difficult to quantify from a monetary perspective, but as a former student athlete, I am well aware of its value and it its overall relationship to overall “pay.” What effect does this problem have upon people? The major and most critical effects of this problem will be realized if the current situation and system are changed. Altering the system to include direct pay / salary for college athletes would prove to be beyond difficult for various reasons. First, there are generally only two sports within a college or university that generate a significant portion of revenue (i.e., men’s basketball and football). All additional college sports teams on average bring in very little to no money at all. With that, athletic departments and universities in general may even be taking a hit by sponsoring these additional athletic programs. According to USA Today, only “23 of 228 Division I athletic programs managed to run a surplus in 2012.” While this exact number may fluctuate each year, the average remains around this low percentage on an annual basis. The only universities who are truly generating a surplus are those who qualify for the BCS conference. It is the football championships that generate the most significant amount of revenue for a university and the number of schools who realize this return are few and far between. Thus, most universities are in fact losing money on their overall athletic programs as things currently stand. If these universities were to add an additional salary requirement for all or a subset of their athletes, additional financial pressure will be put on these schools. Ultimately, the universities will end up being forced to eliminate the athletic teams who aren’t bringing as much or any revenue in. As most of the women’s programs tend to generate less money than the men’s programs, another level of complexity is added to this situation because of Title IX rules and

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regulations. Title IX requires all universities that are receiving federal funds to offer equal opportunities for both men and women. With that, if a women’s athletic team is eliminated, a men’s team will end up needing to be eliminated as well. What economic effects do the problem and potential solutions generate? Because colleges subsidize their athletic programs with money received from student tuition costs, adding a salary for college athletes will most likely lead to a dramatic increase in tuition costs. According to Delta Cost Project, public universities spend an exponential amount of more money on student athletes when compared with that spent on other students. Delta Cost Project estimates that college sports are currently approximately a $6 billion enterprise, with a projected rise due to increasing coaches’ salaries, facility improvements, and even larger / more athletic scholarships for the student athletes. The costs for these expenses are being covered by the university and college budgets and are impacting much more than just the athletic budget. These expenses are eating away at the larger university budgets and taking away from other priorities and often times requiring an additional subsidy. In 2010 alone, Delta Cost Project estimated that athletic departments spent “three to six times more per athlete than colleges and universities spent educating the average individual student.” Additionally, in the Football Bowl Subdivision (FBS), “athletic departments spent roughly $92,000 per athlete in 2010, compared to less than $14,000 per full-time student.” The existing gap between the amount spent on each athlete and that spent on each student continues to grow dramatically each year, as depicted below.

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The Delta Cost Project also determined through their study that athletic departments of these universities and colleges were becoming more and more dependent (purposely) on subsidies from their respective universities / colleges to cover these additional and continuously growing expenses. As we can see from the graph above, institutions are averaging an additional $7,000 in subsidies per athlete over the last five years. Similarly, the graph below shows that these same universities and colleges are now relying more heavily on the additional subsidies to cover these rising costs—a precedent that will result in dramatic economic, ethical, and political impacts.

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A concerning finding that has emerged from Delta Cost Project’s efforts is that athletic spending has actually grown twice as fast as academic spending has at the schools included in the figures above. While FBS was actually an anomaly, increased athletic spending continued to rise for most conferences even during the time of the recent recession endured. The Delta Cost Project concluded that approximately $100,000 is now spent on one athlete per year, in each of the six largest football conferences. They also noted that the more successful athletic programs do see a correlation with increased revenues due to donations or increased ticket sales, and unfortunately may even be seen through higher enrollment rates and increased tuition and student fees. The rapid increase of athletic budgets is not only costing tuition payers of these universities. For public and state schools, some of these costs are being covered by taxpayers—resulting in a collective increase of millions of dollars each year. If an additional salary cost is tacked on to the

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already high and continuously escalating budget, then these effects will become even more dramatic and won’t be looked positively upon. What political or ideological effects does the problem generate? Various political and ideological effects stem from this overall issue of compensating student athletes even more so than already done today. To begin, if we focus only on the ethical and legal concerns and completely ignore the financial and economic impacts, multiple questions still need to be analyzed and answered. Will all student athletes be paid or only a subset of them? Even if all student athletes were in fact paid, would the pay be equally distributed? Depending upon the definition of fairness chosen, either way that question is answered will not end up being fair. If athletes are paid equally, but only certain sports are actually profitable for the university, then providing this additional salary could easily be seen as unfair. On the other hand, if only those athletes that are members of the profitable athletic teams are paid, then the other athletes are likely to be outraged. Even so, the student athletes that are members of the sports teams that don’t typically generate a lot of revenue are already being compensated more than they are technically worth. From an economic perspective, it would be a poor decision to pay them more, but from an ethical standpoint, determining where to draw the line is extremely complicated and complex. To provide a salary to student athletes on the non-revenue sports teams causes universities to use the money generated by the revenue sports teams. Ultimately, this effect will look similar to that of economic redistribution used to diminish economic inequality. Even if it was decided to only pay the student athletes that are members of the revenue sports teams and completely ignore those from non-revenue teams, issues of fairness still exist. It raises questions as to whether or not the entire team should be paid or if only those who are

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making a real impact should be further compensated. It will be extremely difficult—if not completely impossible—for a university to determine which individual student athletes are actually contributing to the revenue generated by the full team. But, if those who are part of the team are paid, but not truly making an impact, the expected backlash from student athletes on non-revenue teams can be expected to increase. Next, if student athletes were to paid, schools would need to determine if pay would vary based on performance or if it would be standardized and set in the beginning of a season. If the salary amount is determined to vary based on performance, then the student athlete gains an even larger amount of unhealthy performance pressure, that individuals at that age are most likely not ready to handle. Additionally, the university and college would need to determine whether or not a salary cap would be implemented. If no cap is implemented, then the competition amongst universities and colleges for individual players will skyrocket. College athletics will become only about where an individual can make the most money, rather than where he or she can receive the best education and develop into the best player and person possible. From the opposite perspective, if a cap is included, the best athletes still aren’t necessarily in the clear with regards to potential exploitation, but the risk will be lessened. Lastly, the impact and effects on Title IX need to strongly be considered. Assuming that Title IX rules and regulations will still apply to pay for student athletes, then it is essentially impossible and illegal to only provide this additional salary in question to the student athletes who are members of the revenue generating teams. Because these revenue generating teams are essentially only men’s basketball and football, only males will receive the additional compensation. Even if women’s basketball is included as a revenue generating team, the issue isn’t fully solved. That only increases the number of women slightly and it won’t come anywhere

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close to that of a football team. Because Title IX requires equality amongst males and females, on all levels, the amount of money spent compensating male athletes must be equal to that spent compensating female athletes. In conclusion, under Title IX, it can be expected that all student athletes must be paid—increasing the total cost even more than initially expected. From a logistical, ethical, and economic perspective, paying student athletes presents more problems than it does solutions. Changing the current course and providing additional compensation to student athletes would be a very complicated process and will result in significant challenges around equity and fairness. For any such changes to truly work, all of these potential issues would need to first be addressed. More importantly, the colleges and universities would also need to determine a financially viable solution to fund additional compensation and true “pay.” 4. Personal Opinion & Individual Perspective As a former college athlete at Northwestern University, this is a topic near and dear to my heart and relevant to today’s cultural policy discussions. While there are various concerns and consideration that must be accounted for when determining the best solutions moving forward, my past experience has also afforded me a unique, but unquantifiable perspective. While I can fully see both sides of this argument, I strongly believe that providing student athletes with additional compensation and true “pay” will have a dramatic and negative impact on college athletics, particularly from a cultural perspective. College athletics today holds an innocence that is difficult to find in professional sports, particularly in the NFL or NBA. The famous quote “for the love of the game” is often transformed into for the love of money as professional athletes are fought for over money, which naturally leads to a financial incentive that is hard to ignore. College athletes reflect a genuine

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sincerity, spirit, passion for the sport, and commitment to their teammates. While I can’t technically prove a correlated or causal link between those values and the lack of a salary, my personal experience strengthens my conclusion. Because college athletes aren’t currently given a true salary, they aren’t incentivized by money. They want to succeed, but not because they know that they will receive a larger paycheck, but because they want to become the best athlete they can and contribute to their team in any way possible. Adding in an additional monetary rewards, outside of the current student athlete compensation package, has unforeseen effects and cultural impacts. I often hear that fans aren’t as interested in professional sports teams as they are college teams because of the reason I described above and because of the genuine passion that college athletes display. Because of that, people currently choose college athletics games over professional. If salary is added to the college playing field, there is a strong potential that genuine nature so greatly admired is lost. With that, comes a loss of game attendance, team memorabilia, and ultimately revenue for the college, the university, and the NCAA. As a former student athlete and current college athletics supporter, I am strongly in favor of maintaining the current compensation package and eliminating any potential of providing athletes with a salary. The complexities behind this issue are too complicated to be fully resolved and result in issues that will greatly impact the game for years to come. 5. The Economic Perspective While my personal opinion may not agree with it, it is important to also communicate the opinion of various economists with regards to this issue. This issue continuously has two sides, even among today’s economists. One particular economist, David Berri, feels strongly that today’s student athletes aren’t adequately compensated for their efforts. The below section

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focuses on highlighting some of the critical components of this argument as they carry a lot of weight, particularly from and economic perspective and bring to the table many valuable insights. Using an analysis of the Indiana Hoosiers, Berri was able to conclude that today’s college athletes aren’t actually paid for their marginal revenue product, which from an economic standpoint is a flaw. Berri conducted a thorough examination of the Indiana Hoosiers’ player statistics and found that one of the top players produced “7.37 wins for Indiana.” While the economic value of a win hasn’t yet been calculated, it is estimated at approximately $100,000 per win. Using the values of the number of wins produced and the dollar figure for a win as inputs, Berri proved that this top player’s “production was worth about $737,000.” This value represents this player’s marginal revenue product. The table included below shows Berri’s calculations and results for each player on the Indiana Hoosiers team during the 2013 season. Player’s Name Victor Oladipo Cody Zeller Jordan Hulls Kevin Ferrell Christian Watford Will Sheehey Remy Abell Jeremy Hollowell Maurice Creek Hanner Mosquera-Perea Jeff Howard Austin Etherington Wins Produced 7.37 5.66 4.56 3.23 2.92 2.42 1.64 0.60 0.43 0.28 0.25 0.24 Marginal Revenue Product $737,129 $565,992 $456,377 $323,131 $291,740 $242,386 $164,178 $60,374 $42,661 $28,060 $24,976 $24,457
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Derek Elston Raphael Smith Taylor Wayer Peter Jurkin TOTALS

0.14 0.10 0.02 -0.03 29.85

$13,742 $10,139 $2,138 -$2,879 $2,984,604

Under Berri’s study, an athletic scholarship to Indiana University is valued at approximately $30,000. Using the table above, this shows that nine of these players are actually being undervalued. In other words, nine of the players are “earning” less than their actual marginal revenue product. While it would be unrealistic to pay the player with the highest MRP the full $737,000, it does still raise a red flag that these athletes are essentially economically undervalued. In alignment with the opinions of Berri and other economists, college athletics could potentially benefit from the implementation of a free market to help lessen the gap between player’s pay and their marginal revenue product. Using Victor Oladipo as an example player, it is possible to see the effects on an individual who generates a significant amount of revenue for his university. While he is well compensated through tuition assistance and coverage of living expenses, according to Berri’s analysis, he is still entitled to much more. Using the free market methodology, Oladipo would receive compensation closer to his marginal revenue product, but this additional cost would end up being covered by the university—which ultimately would be subsidized by increased tuition costs. From another interesting lens, universities today commonly pay college students for work done on college campuses. For example, individuals who swipe cards at the dining hall or check student IDs at the athletic center all receive a salary for their services. Athletes though, don’t technically receive this same salary. If we consider athletics at the college level to be another job held by certain students, then it makes logical and economic sense to reward the workers for
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their efforts. While the impacts of not having a free market are minor to most, there is a great effect on those who are truly the “top earners” of their college athletic teams. The players that bring in the most significant amount of revenue for a college or university should economically receive what they are worth or their marginal revenue product. Under that belief, a free market system would help create fairness in the overall market place and eliminate any deadweight loss that is being spent on policing current NCAA restrictions on athlete salaries. This free labor market would ultimately ensure that the revenue generated by the players that the fans admire actually goes back to those same fans—an important aspect to many. 6. Summary & Conclusion Various sides of this story exist and no right or wrong answer seems to exist. Regardless, any change to the current system will require significant effort and various issues will result. Since today, very few student athletes are actually receiving benefits worth more than the revenue they are actually generating for their school, any change in policy will reward a small subset of players. While the rewards will be small, these same policy changes could end up causing great harm. These changes could end up hurting the greater majority of student athletes whose athletic programs rely on the revenue generated by these few large programs. Whatever decision is ultimately made and implemented, the overall impact on cultural spirit and the nature of the game must be considered. College athletics could ultimately be changed for good and players, coaches, universities and most importantly the fans must all be prepared for such. The analysis above presents insights and facts about both sides of the story and reflects a complex set of opinions—ranging from economists to student athletes. While further compensating all or a subset of student athletes through real “pay” may align with economic analysis, serious concerns from a cultural perspective cannot be overlooked. Colleges are

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currently compensating their student athletes with tuition assistance, housing, coaching, nutritional support, and physical trainers that exceed over $100,000 per year in value. The current system ensures that student athletes are in fact paid and does so in an arguable fair manner. While increasing pay for a few more of these successful athletes will make a small population happier, there is no proof that it will at all improve college sports. On the contrary, it very well may hurt them.

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Appendix A: References            http://www.forbes.com/sites/jeffreydorfman/2013/08/29/pay-college-athletes-theyrealready-paid-up-to-125000year/ http://www.washingtonpost.com/lifestyle/kidspost/should-college-athletes-getpaid/2014/04/09/5cfb4b2c-bf36-11e3-bcec-b71ee10e9bc3_story.html http://www.ugadm.northwestern.edu/financial-aid/tuition-fees-and-expenses.html http://www.garnetandblackattack.com/2010/12/29/1902695/salaries-for-college-athletesan-economic-and-legal-approach http://thinkprogress.org/economy/2013/01/17/1466061/how-rising-college-athleticbudgets-cost-taxpayers-millions-of-dollars-each-year/ http://msn.foxsports.com/collegefootball/story/Paying-student-athletes-could-open-doorto-a-union-and-a-strike-072411 http://freakonomics.com/2013/03/22/how-about-a-free-market-for-college-athletes/ http://thesportjournal.org/article/pointcounterpoint-paying-college-athletes/ http://nces.ed.gov/fastfacts/display.asp?id=93 http://www.nytimes.com/2014/04/27/sports/union-effort-at-northwestern-may-not-meanmuch-for-public-colleges.html?_r=0 http://thesportjournal.org/article/ncaa-division-i-athletics-amateurism-and-exploitation/

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