Why do celebrities earn so much?

But the amount she walked away from (a rumoured $1.8 million) and the amount her co-host Karl Stefanovic is paid (a rumoured $2 million plus bonus) are both jaw-dropping.

Why do we pay celebrities so much money? And for what?

A morning show host saves no lives. They teach no kids, build no homes. The work they do is frivolous really. Why on earth do we give them so much money?

Every industry that produces celebrities is the same. Look at sportspeople, rock stars or TV hosts and you find a group of folks who get paid millions of dollars a year to do - not much work.

It is not always because their work is especially important, it's because their work can reach millions of people at once. You only need a few people to cater to millions of customers.

One TV star can reach millions of people at once, which is why they’re paid so much. The Australian
One TV star can reach millions of people at once, which is why they’re paid so much. The Australian

These industries are different to jobs that help people directly. If you are a lawyer, a carpenter or a teacher you can really only help a few people at a time. Lots of people can make money doing that kind of work. That's different to working in a winner-takes-all industry, where the top few employees make an absolute killing.

Getting paid the big bucks in a winner-takes all industry is not about just being good. It's about being better than the competition. If you're one per cent better, you don't earn one per cent more. You might earn as much as 1000 per cent more. The trade-off is, there's not much space at the top.

According to the Australian Taxation Office, there are about 600 television announcers in Australia. A few get paid the big bucks. But lots are struggling along, hoping if they backstab the right person at the right moment they can get their big break. (The same winner-takes-all dynamic in acting is probably why a guy like Harvey Weinstein can get away with what he did for so long.)

Too many people try to get jobs in winner-takes-all markets. It's like buying a ticket in a lottery. The small chance of big pay is attractive but most people end up earning not very much. You hear about starving artists and struggling actors but not so much about starving bricklayers and struggling plumbers.

One way to look at pay inequality in an industry is to compare the average to the median. If a small number of people are getting paid a lot, the average will be much higher than the median. Here are the top few jobs in Australia where we can see a small number of people getting paid a lot more than the rest - as you can see, a lot of them are sportspeople and artistic types.



Getting into a one-to-one industry is less likely to make you millions but way more reliable. Australia has more than 900 orthopaedic surgeons. All of them are paid hundreds of thousands of dollars a year.



This is important - don't get winner-takes-all jobs confused with ownership. Owning things is still the number one way to make money.

If you look at the BRW Rich List, it's all people who own big companies. Gina Rinehart owns mining companies and her wealth could buy every TV host in Australia in a heartbeat. The celebrities we're talking about - TV hosts, sportspeople and actors are mostly still just employees of big industries.

The real sweet spot is if you are in a winner-takes-all market and you get to own the thing you're selling. For example, a best-selling author can reach millions and has copyright over their work. JK Rowling owns the rights to Harry Potter, and she has a fortune worth around $US1 billion. Mick Jagger co-owns the rights to the Rolling Stones' songs, and has hundreds of millions to show for it.

But of course Jagger is a speck on the shoe of Bill Gates, whose fortune from owning Microsoft is close to $100 billion. That's why Bill Gates could buy the Rolling Stones to launch Windows 95.



When we pay morning TV hosts so much, what does that say about our values?

Do we really think a morning show host is more important than an obstetrician?

The easy answer is that we are not really choosing to pay them more - it's the market. We don't set the pay, it's just a side-effect of how the market works. But that's sort of a cop-out because we choose to let the market decide who gets paid a lot. And if the market outcomes don't seem fair to us, then we can do something about it.

The fact the market tends to be so generous to some people just because their industry is a winner-takes-all market is one reason high taxes on high earners might be fair sometimes. If half of a morning show hosts' millions are taxed, it's not necessarily a tax on hard work - it's partly a tax on good luck.



Industries that are one-to-many are winner-takes-all. Movies are the original example - actors get paid a fortune.

Movies are an example of what happens when technology hits a traditional industry. Before movies, actors were in plays. That's basically a one-to-one style of industry - like being a teacher or a university lecturer. After the invention of film, acting became a one-to-many industry. We can all watch a movie with the best actors in the world and they became multi-millionaire celebrities, while LA is full of people trying to get their big break.

A similar thing is happening now with the internet. A lot of industries that were once one-to-one are now becoming more like acting. The internet allows a few of the very best providers to capture a lot of customers. A big one is university lecturers. Everyone can now watch the top lectures online.

This is not going to change your work if you are a bricklayer, a hairdresser, a surgeon or a lawyer. If your work is physical or if it has to be tailored to the individual, your industry is not going to get turned into a one-to-many, winner-takes-all situation.

But if you provide "content" or general advice, the internet could turn your industry into a winner-takes-all style of industry. And that will make the pay in that industry even more uneven.