25 Oct 2009

No Salary Cap Not So Bad?

This [unedited] guest post is by a student in my EEP100 class (background post).
Please praise/critique/comment on its economic quality and importance to you.

Ken Shimizu says:

As a die hard San Francisco 49ers fan, I thought I would give some insight on the upcoming expiration of the Collective Bargaining Agreement between the owners and the players of the NFL. The CBA expires in 2010, and if a new deal is not in place by the start of the 2010 season, there is a provision in the contract that nullifies the current salary cap structure. To most fans of the NFL, this seems like blasphemy, and would ruin the integrity and competitive balance of the NFL. However, in viewing the uncapped season from an economic perspective, we may see a shift toward a free market solution.

The current salary cap based system relies on revenue sharing and yearly increase in both the salary cap, and the minimum teams must spend. This acts almost like a price ceiling, limiting the amount that players can receive because of the total balance of the NFL teams. Certain positions are deemed as more important than others and players within that position are given relative wages instead of being paid their real value. With the switch to the uncapped structure, players will be given wages closer to their real value. This will theoretically eliminate deadweight loss for both the producer (the player) and the consumer (the owner).

Real life examples show the problem in this system. With the loss of the salary cap and revenue sharing, the balance of power shifts heavily in favor of teams with more money. In looking at Major League Baseball, of the 5 teams with the highest salaries, only the 1 team hasn’t been to the World Series since 2000. Of the bottom 5 teams, only the Florida Marlins have actually been to the World Series in recent memory, and 3 of the 5 teams are at the bottom of the league perennially.

Bottom Line: With the competitive balance of the NFL being one of its most appealing aspects, the owners and the players MUST find a way to agree on a salary-capped structure. Though players may lose out on their market value, they’re still making millions and millions of dollars in the end. Further, creating a large competitive imbalance may create more deadweight loss via players on horrible teams, eliminating the benefit of improved salaries.