Explaining How the NBA Owners Won Again

After the NBA players and owners reached their agreement, I was asked the following question by a couple of different people in the media:  Why did the NBA players’ union not do as well as the players’ union in baseball?

My answer appeared today at Freakonomics.  In Why the NBA Players Keep Losing to the Owners, I focus on what I think is a natural split in the NBA players.

Beyond that split, I thought I would also offer a few more thoughts.  One issue noted at Freakonomics is that the NBA has many salary restrictions while baseball doesn’t have limits on what a player, team, or all players in the league can earn.  It might be useful to again note why the NBA imposes these restrictions.

The owners in the NBA claim that these restrictions are necessary to prevent teams from losing money and to promote competitive balance. However, despite an absence of salary restrictions, baseball – unlike the NBA — doesn’t claim these days that most teams are losing money.  Furthermore, competitive balance in baseball is actually better than what we observe in basketball.  Roger Noll and Gerald Scully developed a measure of balance that compares the actual standard deviation of winning percentage in a league to an idealized standard deviation which would exist if all teams were essentially equal in playing strength.  Since 1983 – when the NBA instituted a cap on team payroll – this ratio has averaged 2.8 in the NBA (it averaged 2.4 in all the years before the payroll cap).  In contrast, in both the American League and National League, this ratio has been 1.7 since 1983 (lower values means more balance).  If we look at the NBA since the cap on individual salaries was put in place in 1999, we again see an average ratio of 2.8.  And in the AL and NL since 1999, we see ratios of 1.9 and 1.7 respectively.  In sum, despite significant restrictions on player compensation in the NBA, basketball has never been as balanced as baseball is today.

Salary restrictions – as I have noted before – do not lead to more balance in a sport.  But if salary restrictions don’t produce better balance, what’s the purpose of these restrictions?  To answer this question we need to note one significant similarity between the two leagues.  Both leagues consist of big market teams (i.e. New York, LA, etc…) and small market teams (i.e. Milwaukee, Minneapolis, etc…).  In both leagues we see that big market teams make much more revenue than the small market teams.  And in both leagues, the root of the labor conflicts we see is how the league is going to address the plight of the small market teams.

As noted in the discussion of baseball’s agreement, small market teams in baseball are aided by significant revenue sharing.  Historically, the NBA has not done much revenue sharing.  In fact, gate receipts in the NBA have not been shared in the past.  Consequently, another mechanism had to be uncovered to help small market teams in basketball.  And that mechanism has been substantial salary controls.

In other words, in baseball we see revenue shortfalls of teams in small markets (i.e. the Pirates) somewhat overcome by payments by teams in the big markets (i.e. the Yankees).  In basketball, the problems of teams in small markets are resolved by taking money from the players.

And why are the owners able to take money from the players?  Hopefully that question was answered today at Freakonomics.

– DJ

Comments are closed.