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THE ECONOMICS OF SPORT AND THE NHL LOCKOUT

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Title: THE ECONOMICS OF SPORT AND THE NHL LOCKOUT


1
CHAPTER 11
  • THE ECONOMICS OF SPORTAND THE NHL LOCKOUT

2
Collective bargaining at work Gary Bettman (NHL
Commissioner) and Bob Goodenow (President of
NHL Players Association) shaking hands.
3
Wide field of economics of sports
  • Analyses of demand for sport
  • Cost-benefit analyses of sporting events and
    sporting activities
  • Sporting governance (labor-management)
  • Business and finance of professional leagues
  • Wage determination
  • Labour-market discrimination
  • Trade in sporting goods industry
  • Media coverage
  • Sponsoring, endorsements
  • Related issues

4
Differing outlook on sports economics
  • N America, Britain, Australia
  • Applied tools of standard supply/demand analyses
  • Focused mostly on pr sport, especially mens team
    sports
  • Continental European
  • More institutionalist
  • Relies on descriptive statistics
  • Devote more attention to sporting goods industry
  • Also to amateur sport, Olympic Games

5
CHAPTER AGENDA
  • Focus on National Hockey League
  • Because it
  • Is most representative of Canadian outlook
  • Has most data available
  • There is much media attention on NHL
  • Illustrates many of the issues involved
  • 2004-05 lockout big event in Canadian sport

6
  • Objectives of chapter
  • Put hockey lockout in economic perspective
  • Explain economic motives and constraints that
    rule NHL hockey
  • Impart and understanding of dynamics of labour
    conflict in team sports
  • Compare economics of NHL hockey with NBA, NFL and
    MLB

7
NHL PROBLEMS
  • Problems identified by NHL previous to 2004
    strike
  • Free-market mechanisms allow the foolish
    decisions of one or two clubs to have detrimental
    financial consequences on all clubs (this is
    called a negative externality in economics)
  • The NHL needs cost certainty, which turned out
    to mean a hard payroll cap, the value of which
    was linked to league-wide revenue
  • Revenue and payroll disparities have widened to
    unprecedented levels, inducing competitive
    imbalance on the ice, thus requiring the creation
    of an economic system where 30 clubs can ice a
    competitive team and be stable
  • A new economic system must also provide
    entertainment to the fans at an affordable and
    competitive price, meaning lower ticket prices.

8
Overview of lockout
  • Lockout Employer stops employees from working
  • Lasted 300 days
  • Settlement negotiated through collective
    bargaining
  • Players took overall 24-percent pay cut
  • Revenue-tied payroll ceiling imposed

9
  • OWNERS
  • Want impediments on labour (player) movement
  • Want imposed salary determination
  • PLAYERS UNION
  • Ask that players be free to move from team to
    team
  • Want salaries freely determined

10
Some definitions
  • CBA Collective bargaining agreement
  • Perpetual reserve clause player forever
    forbidden to change teams without being traded
  • Unrestricted free agent able to move freely
    from one team to another
  • Restricted free agent player can move to other
    team at end of standard-length contract,
    receiving team pays penalty

11
Salary Inflation
  • 1995 restrictions in CBA designed to slow down
    inflation of players salaries by
  • Maintaining restrictive free agency rules
  • Introducing salary caps at entry level
  • Reducing arbitration rights by
  • Restricting its access
  • Allowing teams to avoid rulings of arbitrators

12
Salary Inflation (2)
  • Inspection of table 11.3 (p.202) reveals that
    above measures did not work.
  • Salaries of all major league sports increased in
    1990a
  • Salaries of NHL players increased most quickly

13
Reasons for salary inflation
  • Creation of World Hockey Association increased
    demand for players
  • Publication of salary information
  • More aggressive NHL Player Association
  • Several very large contracts, notably to Wayne
    Gretsky and Eric Lindros
  • Attempts to raid restricted free agents
  • Changes in structure of ownership, financing of
    teams

14
Levitts report on NHL finances2004
  • Only one-third of teams profitable
  • Owners lost 273 million in 2002-3, 225 million
    in 2003-4
  • Results challenged by NHLPA who claim that audit
    of four teams show that net revenues were
    underestimated
  • Creative accounting may account for some of
    these discrepancies

15
Comparison 1993/4 -2002/3
16
NHL PROBLEMS AND THEIR SOLUTIONS
  • Free-market mechanisms allow the foolish
    decisions of one or two clubs to have detrimental
    financial consequences on all clubs (this is
    called a negative externality in economics)
  • The NHL needs cost certainty, which turned
    out to mean a hard payroll cap, the value of
    which was linked to league-wide revenue
  • Revenue and payroll disparities have widened
    to unprecedented levels, inducing competitive
    imbalance on the ice, thus requiring the creation
    of an economic system where 30 clubs can ice a
    competitive team and be stable
  • A new economic system must also provide
    entertainment to the fans at an affordable and
    competitive price, meaning lower ticket prices.
  • NHL, 2004

17
2005 Collective AgreementSix major points
  • Salary contracts rolled back by 24
  • Owners imposed payroll cap and floor
  • Payroll cap linked to league revenues
  • Salary of individual player limited
  • Rookie salaries and bonuses capped
  • Qualifying offers and players access to salary
    arbitration tightened owners bring overpaid
    players to arbitration

18
Results of these changes
  • New outlook for Canadian franchises
  • Ticket prices have gone down
  • Canadian teams rank better in attendance
  • Bottom line of Canadian teams improved

19
Role of the Public Sector
  • In US, construction of arenas often subsidized
    directly or indirectly by government agencies
  • Canada not so receptive to this 1999 government
    reversed decision to help NHL teams after public
    outcry
  • Better outlook for NHL teams in Canada probably
    mean less government handouts or tax breaks.

20
CONCLUSION
  • Economics of NHL changed radically in few years
  • Partly due to general economic conditions
  • May be partly due to payroll cap in 2005 CBA
  • Outlook for NHL hockey good
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