Looking at the Lockout Economically

I recently completed a final paper analyzing the NFL lockout for my labor economics class. The research involved led to some interesting conclusions regarding the history of labor relations in professional sports leagues and necessarily into some insight regarding the situation at hand in the NFL.

While it would be easy to reprint the text in its entirety here, the paper is long and mostly based on in-depth economic modeling . Instead, I will attempt to distill my argument and present what I think are the most interesting and relevant points. 

To gain some perspective on the lockout, I think its important to look at how the NFL works on a broad economic level.

Modeling the NFL:

You can think about the NFL as a collection of individual teams that employ players. Any individual player brings a certain amount of value to the team in terms of additional performance on the field. If you think of the teams as individual firms, their objectives should economically be to maximize profits (we'll come back to this assumption later). Seen in this light, an individual player also brings a value to the team in terms of the additional revenue the team generates from hiring that player.

Because football is a team sport, a player's value depends on the other players on the team. Some players are more effective when surrounded by a more talented team and would bring different amounts of value to different teams. Less obviously, the player's value to a team also depends on the talent level of other teams in the league. To see why, we have to look at what drives the overall demand for NFL football.

What drives demand for NFL football?

One of the biggest attractions to sport is the understanding that any team can win any given game. The uncertainty over a game's outcome makes it fun to watch. So the NFL has a huge incentive to make the league as competitive as possible and make each and every game exciting. To this end, the NFL favors poorly-performing teams in the draft and adds a salary floor to the salary cap. For this reason, a player's value depends on the distribution of talent across the rival teams.

Another aspect of making each game exciting is how much each game means for the overall picture. The NFL has a 16-game regular season, while the NBA's is 82 games long and each MLB team plays over 150 games per season, sometimes playing more than one game in a day. Consequently, each NFL game has a much larger impact than a basketball or baseball game and the uncertainty in each matchup means relatively more. 

Yeah, thats interesting, but so what?

The basic economic model of a professional sports league assumes that owners rationally pursue a profit-maximizing strategy. The real world doesn't operate like that. In this world, owning a professional sports franchise may have become more of "a rich person's hobby." Changing teams' objectives changes the competition between teams into a zero-sum game. There must necessarily be an equal number of wins and losses. Non-profit-maximizing objectives lead to a distortion the market for free agents where salary offers are not necessarily constrained by the player's financial value to the organization, resulting in both rapidly increasing player salaries and an imbalance in the league's talent distribution. These prospects only worsen when considering the differences in financial resources between large-market and small-market teams. 

So how does the league maintain parity?

The league exists as a collection of competing teams, but maintaining competitiveness creates huge benefits for everyone, providing a huge incentive for the teams to act as a cartel in order to maximize competitiveness. To this end, the league uses a profit-sharing mechanism to help smaller-market teams compete with the huge revenues brought in by teams in larger cities.

The original rallying cry for the salary cap was to prevent ballooning player salaries, but it also preserves the league's talent distribution. Because larger teams have larger fanbases, players should have greater absolute financial value to teams in larger markets. Consequently, teams in larger markets should be able to safely outbid smaller teams for the most talented players. An effective salary cap limits a team's total payroll, and mitigates the large-market team's advantage.

A salary floor, combined with revenue-sharing, means that smaller teams must spend up to a certain level, presumably meaning that the talent level among all teams is very similar.

Important sidenote: the NFL acts in ways that would typically be illegal under anti-trust law (using revenue sharing, a salary cap, and the draft are major examples). Historically, it has enjoyed an exemption from antitrust law. In first few decades of players unions, that exemption came under fire in the courts. Now, the exemption exists because the offending practices are covered by the collective bargaining agreements between the league and the players union. Without a union and a CBA, the NFL would most likely be found to violate antitrust law.

Getting to the owners' argument of unsustainability...

A theoretical model of a league (again assuming profit-maximizing owners) with effective revenue sharing, salary cap, and salary floor may not be ideal, but it should give an indication of directional relationships between variables. 

The model concludes that, as expected, revenue-sharing results in increased profits for smaller-market teams and lower profits for large-market teams, though total profits are unaffected. More interestingly, it concludes that instituting a tighter salary cap results in a lower cost per unit of talent and raising the salary floor means the opposite, an increasing price per unit of talent.

These relationships are important because of the structure of the NFL's salary cap and floor. Since the last CBA came into effect, the salary floor has been increasing as a percentage of the salary cap by 1.2% per year. Based on the theoretical model, the rising player costs cited by the owners could be explained by the rising salary floor, potentially leading to a situation that is indeed unsustainable. But as the players say, we don't know without auditing the NFL's books.

So how does the lockout end?

The end-point depends entirely on whether the parties are forced to play next season with the rules carrying over from 2010. If they are, the two sides can negotiate a compromise that benefits both parties. Something similar occurred in the late 80's in the NFL, but a new CBA wasn't signed until 1993 (though it was renewed largely in its original form until the owners decided to opt out last year).

In the event that the lockout continues into the 2011 regular season, I don't like the players' chances. Historically, the NFLPA has been the weakest of the big four players unions, suffering from a lack of solidarity. You would think that the centrality of teamwork in football would lend itself to union strength, but NFL strikes have failed repeatedly because players cross picket lines. Because the difference in performance between one and another NFL player is so small, he is relatively easy to replace and has very little bargaining power. Because the union (or trade association now) must appeal to the median voter, whose place in the professional ranks is less secure than in other sports (in part because there are very few other professional football leagues where basketball, hockey, and baseball players have competitive alternative leagues in other countries), I feel like the NFL players would be quicker to replace the union (trade association, whatever) president with someone more likely to get a deal done that secures jobs for the players than players in other sports. In this case, both sides would again have to compromise, but the players would have to give more ground than the league.

But cancelling the season would permanently hurt the NFL's fanbase, wouldn't it?

The argument is that when a whole season gets cancelled that fans will permanently substitute away from one sport and towards something else, but the evidence returns mixed results. I've found a statistical analysis concluding that when controlling for the effects of new stadiums on attendance, baseball attendance has been permanently damaged since the year-long strike in 1994-95 while another claims that "none of the events we examined had a permanent impact upon attendance in these sports. In fact, in almost all instances attendance immediately rebounded in the year following the labor conflict." 

So putting it all together...

I dunno. How long each side holds out at the bargaining table depends on how much they think they stand to benefit or lose. If $800 million actually separates the sides (I highly doubt the number is actually that high), the players stand to gain over $400 million per year by holding out (the salary cap is something like 55% of the money remaining after the league takes its $1 billion off the top). With numbers like that, its reasonable to believe that neither side would give ground until games start getting cancelled and real money starts getting lost.

It's a bit depressing, but regardless of when it happens, the next snap of NFL football certainly won't suffer from a lack of anticipation.

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