WAS BABE RUTH UNDER PAID?

INTRODUCTION

In 1931, Babe Ruth made $80,000 per year. Was the Great Bambino overpaid or underpaid according to today's standards? On average, Major League Baseball (MLB) players today earn about $2.5 million per year. This lesson will provide you with tools for answering this question.Determine whether Babe Ruth was overpaid or underpaid in comparison to today's MLB players. This question can be answered by using the Consumer Price Index (CPI) to adjust Ruth's salary for changes in the price level.

MATERIALS

  • USA Today: This site presents data on salaries for today's MLB players
  • What is a Dollar Worth?:This site provides an inflation calculator
  • Month to Month CPI Figures
  • What is a Dollar Worth: This site contains information regarding Consumer Price Index (CPI) data
  • This is a calculator that can be used for any math problem.

PROCESS

The Consumer Price Index (CPI) can be used to compare dollar figures from different times accurately. You may have heard your grandparents telling them that they remember when a gallon of gas cost a quarter or a loaf of bread cost a dime. But those numbers by themselves don't tell us how expensive things were in the old days compared to now. It's the same with salary figures from the past. For example in 1931 when Babe Ruth had a batting average of .373 with 46 home runs and 163 RBIs, an ice-cream cone cost five cents and going to a movie in a theater cost a quarter. Ruth's salary then was $80,000 per year. But it is not clear from that salary figure alone whether Ruth enjoyed better or worse purchasing power than today's players.

In order to investigate this question, a couple of concepts from economics must be introduced. First, the inflation rate: It is the percentage of increase in the price level of the economy as measured by the CPI. The CPI tracks the overall price change for a fixed basket of goods and services bought by a typical working-class urban family over time. It is a measure of price changes in consumer goods - also known as the "cost of living index." The CPI "basket" contains goods and services that have been chosen for the CPI survey. Imagine a shopping basket loaded up with fruit, chocolate, meat, chips and other items from each of thenine groups of goods and services used in the CPI. The items in the basket must be identical in quantity and quality over a period of time. Some changes in prices may be due to increased quality or improved packaging, but these are not "pure" price changes. When this happens, price adjustments are made to remove the effect of these changes.
We can also distinguish betweencurrentdollars and constant dollars. The value of the income (or purchase) at the time it was actually earned (or spent) is measured in current dollars. Current dollars are dollars from other time periods converted into present-day dollars, in order to factor out the effects of inflation. Adjusting a current dollar figure to show the impact of inflation on the purchasing power converts the figure into constant dollars. Constant dollars eliminate the changes in the purchasing power of the dollar over time. The result is a series as it would exist if the dollar had a purchasing power equal to its purchasing power in the base year. For example, it is more useful to compare the change in annual wages measured in constant dollars than in current dollars because of the effect of inflation on purchasing power. While wages in current dollars may have risen over time, wages in constant dollars may have declined because prices of goods and services that workers bought rose more than wages.
Given all of this, how do we actually make the comparison? Well, this is done using a simple formula as follows:

Note: *= multiplication
Salary in Constant Dollars (Recent Year)= Salary in Current Dollars (Old Year)*(CPI in Recent Year/CPI in Old Year)
Ruth salary in 2014 Constant Dollars= Ruth Salary in 1931 Current Dollars * (CPI in 2005/CPI in 1931)

Answer______

Why might Babe Ruth have been underpaid?

How do sports teams earn revenue in 2014?

Is it true or false to say that high player salaries are the reason that pro sports ticket prices are so high?

What occupations are likely to pay high salaries when you enter the labor force?

What are some other factors that may affect employee wages?

Product / 2014 Price / 1984 Price / 1954 Price / 1924 Price
New Car / $28,000
Football Ticket / $40
New House / $250,000
Refrigerator / $800
Gallon of Gas / $3.00
Gallon of Milk / $3.50
Loaf of Bread / $1.50
Cup of Coffee / $1.69
Chipotle Burrito / $8.00
Pizza / $14.00
Movie Ticket / $13.00
T-Shirt / $20.00
TV / $600
Bike / $150
Shoes / $100