The NBA has instituted a variety of caps on payroll. There is the famous salary cap, which limits how much each team can spend on its payroll. There is also a maximum salary, which is a cap on individual player salaries (and yes, this would be better called a salary cap). And finally there is a cap on rookie pay, which limits how much a draft choice can earn on his first contract.
All of these restrictions are designed to limit a player’s pay. And whenever we observe an employer trying to limit an employee’s pay, we suspect that those workers might be exploited.
As noted before, exploitation is defined as a level of pay that is below the revenue the worker is generating for the firm. If a worker is paid $10 an hour, but only generates $8 of value, then that worker is not exploited. But if a worker is paid $10 million, but generates $12 million in value, then by definition he or she is exploited.
Given this definition, which players in the NBA are the most exploited? In other words, who is the most underpaid?
Questioning the Methodology
Before answering this question, we need to review the methodology designed to address such issues.
A few days ago I presented a list of the Most Overpaid Players in the NBA. This list was derived by first determining the economic value of a win. The methodology for determining this value was detailed in a post from last year:
The standard approach is to simply regress team revenue on wins (and other stuff). But I think there’s a problem with this approach for the NBA (a problem I wish to avoid getting in to for a blog entry), so I am going to estimate the value of a win differently. According to USA Today, NBA teams paid their players $1.818 billion in 2006-07. We know from our research on revenue and attendance [mentioned in The Wages of Wins, which is soon to be published as a paperback :) ] that players primarily generate value in the NBA via their ability to generate wins. And we also know that a player’s wage is only for the regular season. Consequently, we could say that the value of one win in the NBA is simply the amount of money the league paid its players divided by how many wins these players produced in the regular season.
Such an approach makes three assumptions. I am assuming that all players in the NBA are collectively paid what they are worth (which may be true if the union bargained effectively), players are only paid to produce wins (which is a reasonable assumption given the research cited above), and the value of a win is the same for all teams (okay, not true, but two out of three ain’t too bad).
When I presented the post on the Overpaid in 2007-08 I noted that I was not entirely pleased with this approach. After thinking about it a bit more, I think I can do better. But I don’t feel like working through my idea for a blog post. So for the “Underpaid”, I think I will keep the same methodology (even if I think it’s not entirely correct). In other words, with more than $2 billion paid to players and 1230 regular season wins, I am still going to argue that each win (if this were the right way to do this) is worth $1,671,230. Given this value, who is the leader of the exploited?
The answer is reported in Table One.
Chris Paul – the M2P (Most Productive Player) of 2007-08 – produced 25.4 wins this past season. Given the value of a win (which is probably overstated for New Orleans), Paul was worth more than $42 million. But he was only paid $3.6 million. These two values give us a gap of nearly $39 million.
The second Most Productive Player is Dwight Howard. Howard produced 24.6 wins and was only paid about $6 million. So once again we see a gap of more than $30 million.
What do Paul and Howard have in common? Each was working in 2007-08 under their original rookie deal. Since this is set by the league — via collective bargaining with a union that is controlled by veteran players – it’s not surprising to see young stars be exploited.
What might be surprising are the other names on the list. LeBron James, Chauncey Billups, and Steve Nash are all veteran stars earning more than $10 million per season. But each player is worth much more than the contract signed, so following our definition, each is exploited.
Looking over our list we see three basic features of the labor market in the NBA.
1. Young stars – like Paul, Howard, Deron Williams, David Lee, Al Jefferson, and Andre Iguodola – are exploited.
2. Older stars – like LeBron, Billups, Nash, and Manu Ginobili – can produce more than the vast sums of money they are paid.
3. And non-scorers – like Tyson Chandler, Marcus Camby, Andris Biedrins (who also fits under #1) – can also produce much more than they are paid (a story told in The Wages of Wins).
The last two names on the list – Jose Calderon and Monta Ellis – I think are examples of players who are producing far more than originally expected. By definition these players are still exploited. But it is not necessarily due to any systematic issue with the league.
Ignoring Calderon and Ellis, we see in Table One the basics of how pay is structured in the NBA. The union is dominated by veterans who are not stars. Consequently the league is able to get these players to agree to a rookie cap. After all, these veterans are not rookies. These non-star veterans have also agreed to a limit on what star players can earn. After all – by definition – the non-stars are not stars. As a result, a player like Tim Duncan (not listed) can earn $19 million but still be worth (again, according to the methodology outlined above) more than $30 million.
So should we be concerned if a player like Chris Paul is exploited? No, but it does tell us why teams make such an effort to secure the services of the top young talent in the NBA draft. If you actually draft a young star, an NBA team can secure a small fortune.
Of course, as has been noted before, most players drafted are not going to be NBA stars. Most of these players – if they survive – will morph into the non-star veterans who dominate the player’s union. And these players will continue to agree to limit the salaries of all the players who are not like them. Such limits will continue to cause players like Chris Paul and Dwight Howard (i.e. young stars), as well as LeBron James and Tim Duncan (old stars) to be exploited.
Our research on the NBA was summarized HERE.
Wins Produced, Win Score, and PAWSmin are also discussed in the following posts:
Finally, A Guide to Evaluating Models contains useful hints on how to interpret and evaluate statistical models.