Tuesday, September 29, 2009

NHL Salary Cap and Competitive Balance

In today's USA Today, there is an article stating that the salary cap leads to greater competitive balance. In fact the article quotes David Poile, GM of the Nashville Predators as saying, "[t]he salary cap has brought competitive balance to the league."

We will tackle this issue formally later in the Sports Economics course, but for now let's test this hypothesis informally. Since we only have four years of results with a salary cap, the results must be taken with a grain of salt - in other words I cannot make a conclusive statement either way, but will be able to make some conjectures below. So has the salary cap (payroll cap) brought competitive balance to the NHL?

Let's see what is happening to competitive balance in the NHL from a few different angles. One way of looking at this is to compare the level of competitive balance - as measured by the Noll-Scully metric - for the four years before the payroll cap and the four years after the payroll cap. Here are the results:











As evident in the table above, the Noll-Scully metric of competitive balance decreased from the during the four years before the payroll cap, and decreased during the four years after the payroll cap (in bold). Remember that as the Noll-Scully gets closer to zero, competitive balance is improving in the league, so smaller numbers are increases in competitive balance.

But this is really not anything new. Since the 1970's, the average measure of the Noll-Scully metric has been declining as shown in the table below. (Note the 2000's does not include the 2009-10 season, since it has not occurred yet).

Decade Ave. Noll-Scully
1970's 2.557
1980's 1.969
1990's 1.796
2000's 1.538

Hence, stating that the decline in Noll-Scully measure of competitive balance in the four years since the introduction of the payroll cap ignores the decades of decline in the Noll-Scully measure of competitive balance WITHOUT a payroll cap.

As we argue in The Wages of Wins, and detail in our paper - The Short Supply of Tall People - competitive balance is declining not because of changes in league institutional rules - such as payroll caps - but rather due to the increasing pool of talent to play sports, such as hockey. So I am skeptical that the payroll cap is really having anything to do with the declines in the Noll-Scully measure of competitive balance.

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