The NBA’s continual flurry of major offseason action continues to dwarf that of the NHL, hockey’s biggest market finds itself in a cap bind and exciting trades have apparently disappeared. Oh, the humanity!
Why did the NHL introduce the idea of a hard salary cap? One of the many reasons was laid out in 2003 after the NHL-commissioned Levitt Report determined that league operations were not consistent with sound business practices. Player revenue had been exceeding 70% of franchise operating costs and with no cap on salaries, large market teams continually drove up aggregate prices by overpaying on the open market.
When the NHL owners got their #1 wish-list item after the lost 2004-2005 season, media, players and fans alike overwhelmingly declared the hard cap as a victory for the league at the expense of the players. While the 2005 CBA represented a “reset” of player values, it never stopped salaries from increasing exponentially – the cap now more than doubled from it’s position in 2005. They’re simply increasing at a more sustainable rate, and the game is healthier than ever before.
Say “no” to a luxury tax
When the macro-economy fluctuates from recession to inflation, taxes and interest rates typically increase in an effort to curb spending. This helps to keep price levels under control. You and I are disproportionately affected insofar as it’s much harder for us to now acquire cheap loans and our spending power is decreased. And the rich? Well, sure – it’s more expensive for them to acquire their loans, but their spending power and assets insure them from feeling the weight of the economy like we do.
Luxury taxes perpetuate a similar power imbalance in sporting leagues by allowing teams in larger (more traditional) markets to throw money at curing their own ineptitude, buy their way in to contention and avoid feeling the brunt of rising costs that they themselves are responsible for.
The rich have options – in society and in the owner’s suite. A hard cap is not about helping the stupid at the expense of the smart. It’s about leveling the playing field to ensure the overall health of our game.
A hard salary cap (devoid of luxury tax) helps the health of sporting leagues in two important ways:
- Increases parity between large and small market teams
- Combats pay inequality among players
In the NHL’s particular case it importantly reigned in skyrocketing, unsustainable player contracts that became the norm throughout the 90’s. As we will see, the first point is also of particular importance to the world’s biggest hockey league.
Why parity is important
League parity is uniquely important to the NHL because they operate in so many non-traditional hockey markets where winning means everything in terms of growing the league and sport.
In 2005-06, the Nashville Predators had their first majorly successful season – hockey enrollment increased by 20% the next year in that state alone. When Florida made the Stanley Cup Finals in 1996, hockey enrollment increased by 12% in the southeastern United States the next year – not to be outdone by a 21% increase in enrollment in the Rocky Mountain region after an Avalanche Stanley Cup. The last time the Coyotes made the playoffs, it resulted in a 13% boost to enrollment in the desert, even after a first-round sweep.
That catalyst in Arizona has been massive for the growth of the game in a market consisting of millions of people that had never given a second thought to the game of hockey before the arrival of the Coyotes. The league doesn’t prop up these franchises in an attempt to purposely waste resources – it’s a deliberate attempt at growing the game in new markets that were once considered a pipe dream without the current technology and infrastructure available.
Expansion is one of the NHL’s greatest cash cows. The phenomenal price tag that the Golden Knights were forced to pay to field a team in Las Vegas was direct commentary on the health and outlook of the league. Contraction, frequent relocation – these are death wishes to a growing game. They make investors wary, they lower the aggregate demand for the product, and they slow overall revenue.
The fact is, a luxury tax does nothing for the overall health of the league. You could mandate that portions of the luxury tax be redistributed to teams who are worse off economically, but revenue sharing under the NHL’s current CBA already does this. It does so without allowing a handful of teams to drive up player costs for everyone else, and it allows more teams to remain competitive. The harder it is for small-market teams to compete, the more likely they are to lag financially which means the costs of revenue redistribution will only continue to increase while jeopardizing growth with threats of contraction and/or relocation.
Combating pay inequities and the erosion of hockey’s “middle class”
As far back as 1981, economist Sherwin Rosen discussed what he called the “phenomenon of Superstars” in particular markets that were accentuated by a concentration of output among few individuals, skewness in distributions of income and large rewards at the top.
“With elastic demands there is a tendency for increasing concentration of income at the top” – The Economics of Superstars
Allow me to explain: an expansion of buying power for a small number of teams resulting from the introduction of a luxury tax will inevitably lead to an inflated advantage for “higher quality sellers” (players). This is because buyers (franchises) are economical and will attempt to minimize their consumption costs. So when they’re forced to pay exorbitant amounts to either retain or attain superstar players who have much more leverage under a soft cap system, they are forced to surround those superstars with cheaper talent – leading to an erosion of the sport’s “middle class” and confounding the income inequality.
This is seen in Major League Baseball today, where (since the introduction of a luxury tax) the median MLB salary increased less then $300,000 from 1997 to 2014, and the max salary increased by over $20,000,000 in the same time frame. In baseball today, more wealth is concentrating at the top, resulting in more players falling in to lower income quintiles. As teams look to begin ridding themselves of luxury taxes, more and more players are being forced to hold out for deals that would appear to be well below their perceived market value (Dallas Keuchel and Craig Kimbrel being the latest examples). Houston ace Justin Verlander recently called baseball’s free agency period “broken” as serviceable players went without contracts in to February and beyond. But this is the reality of a system that pitted team against team and encouraged them to inflate star salaries as a result of bidding wars in a free market system – at the end of the day, a sports team is a business and they operate in the business of making money which includes cutting costs.
The NBA (which also has a soft cap and luxury tax) has done a much better job than the MLB at preserving income equality using special rules such as an individual cap. But it’s also much easier to maintain elevating wage levels across the board when you’re only fielding rosters of 13, as opposed to 23 – smaller rosters allow better talent to saturate the marketplace and keep wages up for everyone. It’s much more complicated in the NHL, where talent dilution occurs across the board and is only going to get worse as expansion continues with Seattle. It’s perhaps in everyone’s best interest to fight inequality, as research suggests that increased salary disparity leads to worse overall team performance.
Even still, the soft cap system in the NBA comes at the expense of league-wide parity, making it the least competitive league in North America by a wide margin, allowing teams to buy 2 or 3 superstars and guarantee themselves success. The issue we see here, however, is that even with large-scale revenue redistribution, a luxury tax still allows the big market teams to attract most of the league’s talent. Large markets, after all, are able to offer fringe benefits that no small market team can compete with.
The only major professional sporting league in the world that is less competitive than the NBA is La Liga, where two teams have split 14 of the last 15 championships.
A Gini Coefficient is utilized to measure the wealth distribution of a nation. Utilizing preseason title odds as a measure of distribution in various sporting leagues, Harvard alumni Andrew Puopolo found the NBA’s Gini Coefficient to be just under 0.8 (complete inequality being represented by 1). To illuminate that in a different way, the NBA and La Liga’s competitive structures have higher degrees of inequality than any country on the planet.
In summation, the NBA has more equality than the MLB, but much less parity. The MLB has more parity than the NBA, but much more salary inequality. The NHL’s hard cap system has so far proven to be the only system that can perpetuate both parity and equality.
Salary inequality across major North American sports as represented by a Gini Coefficient pic.twitter.com/vRT0tBwzSs
— Luke Armstrong (@armstrongthings) July 24, 2019
A soft cap system would hurt hockey in both ways: income inequality and the reduction of league parity.
In soft cap systems you can’t blame franchises for paying what they have to for a superstar on the free market anymore than you can blame the player for accepting an artificially inflated salary. At the end of the day, both parties are acting in an economical self-interest – one believing that they are putting themselves in a better position to win while reaping the benefits that go along with it, and the other increasing their earning potential to take care of their family.
But this “free market” exchange takes place in a much different arena. It’s a closed system – with very few sellers (players) at the top, and very few buyers (teams) who can meet the inflated demands that are perpetuated by a soft cap/luxury tax system. This inevitably leads to a tilted league, in which you would have small market teams clinging to life in non-traditional hockey markets and an erosion of income equality as more money flows to the top.
Connor McDavid surely could have commanded much more money from Edmonton in systems that we see instituted by the NBA or MLB. But one player can’t carry a hockey team. It is in the best interest of both the players and the owners that salaries increase at a rate that is reflective of the financial health of the market in which they operate.
The NHL’s current system is not perfect. I might argue escrow payments are too high, or the cap floor is too low. But these things will all be hashed out when the current CBA expires. The fact is that the hard cap has absolutely been the best choice for the league, players and the grassroots growth of the game.
For additional research, I would refer you to Stefan Kesenne’s paper, “The Impact of Salary Caps in Professional Team Sports” published by the Scottish Journal of Political Economy.
Say hi on Twitter: @armstrongthings