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In the youtube video Why We Look down on Low Wage Earners the author argued: "economics states that wages are determined [...] by the number of people willing and being able to do a given job that others won't do." (video at 1:00). While this explains much of the variance in the wages of different jobs, it does not give in my opinion a good explanation, why celebrities earn high wages.

Take for example actors. There are a lot of people working in this field and there are many more wanting to become an actor or actress. Due to the quoted theory the wages in this field should be low which is not the case for celebrities. The theory does also not explain the variance of the wages inside this field (compare the median hourly earning of actors / actresses with those of celebrities).

My question: How do economics explains the outliers in the wages in form of the high earnings of celebrities? How does popularity exert an influence here? (Do celebrities get much money because they are popular or are they popular because they are rich?) How does economics explains the different wages for a certain kind of job?

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A fair number of people are willing and able to act as well as Scarlett Johansson. A much lower number (one) are able to actually be Scarlett Johansson. (This is related to why people will, e.g. pay a premium for name-brand Coca-Cola over a generic cola that tastes just as good.) – R.M. Feb 18 at 19:08
Note also that from an ex-ante perspective (before a person becomes a celebrity (and enjoys network effects outlined in @Fuca26's answer) but already commits to a career path such as acting), celebrities do not earn much. Their earnings are simply a lottery between a very low income and an extremely high income. – HRSE Feb 19 at 8:12
@HRSE. Also, network externalities make me think even more about sports (even though the following applies to show biz) and merchandise. Think about old football players at the end of their career who still earn relatively a lot, for instance, Totti in Rome. Although he does not play much at a good level anymore, his jersey is sold still a lot, not just in Italy, and people buy tickets and pay-per-view credit just to see him; thus, he generates a large revenue for his team that alone justifies his wage. – Fuca26 Feb 19 at 8:52
Very related (duplicate?):… – FooBar Feb 19 at 15:31
@HRSE: There are many definitions, but "celebrities" are usually defined as people who can be recognized by a significant fraction of the population, much higher than normal people. A little known actor is just an actor, not a celebrity; and you can also become a celebrity without being anywhere near the media industry. Celebrities are highly paid because we put a value in someone who is well recognized, because anything that a celebrity say or do will be heard/seen by many people, much more than the large number of little known actors. – Lie Ryan Feb 20 at 12:04
up vote 29 down vote accepted

If you ask yourself how much a potential employer would have to pay you to convince you to work for him, the answer is probably something like "at least as much as I could earn by doing the same job for another employer". So, provided there are several employers competing to hire workers, you can think of employers as bidding against each other for the best employees. But how much will firms bid? Each employer would be willing to pay up to the difference between its profit if it hired this particular worker and its profit if it took the next best alternative.

This is why the supply of alternative employees matters. If there are many people capable of doing the same job then a firm's profit if it hires you will be almost the same as the profit if it hire someone else. So why should it 'bid' a lot to hire you? An unskilled factory worker who asks his employer for a significant pay rise will likely be refused because virtually any worker doing the same job would have equivalent productivity.

Celebrities are a different story. Just as factory workers are hired to produce goods for the factory owner, actors are hired to produce movie ticket sales for the studio. But viewed in this light, Tom Hanks or Angelina Jolie are not close substitutes for as yet unknown actors at all. Indeed well-known actors are considerably better at producing ticket sales than unknown talent. Studios are willing to bid a lot to attract top actors because having a star in your cast is worth millions of dollars in extra ticket sales.

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I suggest to learn more about the Economics of Superstars. Within the economics field, the "superstar" term is "...used to refer to extreme wage outliers (Adler, 1985; Rosen, 1981). These outliers are such that in a labor market there appears to be a convex relationship between wages and skills (Lucifora & Simmons, 2003). There are two main competing, yet not mutually exclusive, superstar theories: Rosen (1981) suggests that superstars enjoy huge salaries because of a scarcity of talent, so that a little additional talent translates into large additional earnings, whereas Adler (1985) suggests that huge salaries are caused by positive network externalities that create additional popularity, even in the absence of talent. (Fumarco & Rossi, 2015, p.17)"

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As you might note, also, the superstar term do not pertain only to the sports field, but also to stardom more in general. I suggest to read also the general introduction to the theory of superstars that you might find in the Handbook of the Economics of Art and Culture, Volume 1 Edited by Victor A. Ginsburgh and David Throsby, 2006, written by Adler himself – Fuca26 Feb 18 at 17:29
I have just found out that Rosen expanded this theory to firms CEO already in 1982. Which relates to @Ubiquitous' answer below. – Fuca26 Feb 18 at 18:19

The other answers already give a good explanation about how actors are not easily replaced. But I'd like to highlight a flaw in the premise of your question: namely that you are cherry-picking data. You cannot consider the median wage of actors/actresses without considering the entire cohort. You are only looking at the winners, if it were possible (and maybe it is) to calculate the median hourly wage of everyone trying to work in the industry versus only the lucky/talented successful few it would be much lower.

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Note that this is the reason why I have asked how economics explains the different wages inside a certain working field, especially the occurrence of extreme outliers... – tampis Feb 19 at 15:03
Consider the pay for athletes in the premier leagues of their respective sports vs. the lowest-level leagues. People who can hit a Major-League curve ball can command premium pay because so few can perform at that level. A team can't pay two other batters half as much to produce the same amount of hits. – Monty Harder Feb 19 at 18:23

They are both irreplacable and cause the people to work for to earn lots of money.

Celebrities, by definition, are personalities with mass appeal and are therefore known by a large number of people. A certain portion of the people who know them will pay to see / hear them specifically (e.g. in a movie).

Therefore they, through their agent, are well able to justify their high wage to their employer, who would make considerably less money from the product without them. (Unlike, say, a factory worker of a well-known brand who could easily be replaced without anyone noticing)

So Leonardo diCaprio doesn't have to be particularly loved by anyone, just liked by enough millions of people enough to make them buy a ticket to the film. If this results in his appearance boosting the film's income by €50 million, he could probably easily ask for a wage of, say, €25 million.

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I would argue that a large amount of what they're being paid isn't compensation for the work being done but a fee to have access to their "brand". The company producing the film is purchasing certainty in box-office takings, not employing them to act a role. The payment therefore has multiple components and can't be analysed simply as wages.

It's possible that there is no need for the actor to appear in the movie at all but could sell the rights for the production company to associate their name and image with the film when publicising it. That would, however, probably have a negative impact on their public image, reducing it's value accordingly.

However I'm not an economist so feel free to downvote this answer as just ignorant opinion.

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It's still supply and demand. There are thousands of actors, but there is only one Tom Cruise. Thus he can command a high wage. It's not like they are a commodity, where each one is exactly alike, or very similar as would be the case for crane operators.

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I fail to see how this answer adds any information on top of the existing answers (in particular, Jared and Ubitiquous) – FooBar Feb 19 at 16:30

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