Economist Kevin Murphy Talks NBA Lockout Negotiations

We’ve written a lot about University of Chicago economist Kevin Murphy. He teaches at the Becker Center on Chicago Price Theory, where Steve Levitt is the director. Murphy was a MacArthur Genius Fellow back in 2005, and Levitt readily admits that Murphy is the smartest person he knows.

This fall, Murphy has been working with the NBA players union in its negotiations with team owners over the NBA lockout. Steve Aschburner of NBA.com sat down with Murphy for a lengthy and very interesting Q&A on the tricky economics of the NBA, and what role he is playing at the negotiating table. Here are a few highlights:

NBA.com: People are familiar with a lot of the names and faces in the negotiations — David Stern, Billy Hunter, Derek Fisher — but you’re largely unknown to fans and the media. Tell us what you do in the room.

Kevin Murphy: My role is to try to really understand the various positions put forward by the sides and how they’ll ultimately play out. You talk changes to the luxury tax system or changes to free agency, changes to just about anything, that all has pretty wide-ranging effects on length of contracts, guarantees, salaries, just about everything that matters to the players and to the owners. They’re all interconnected, which makes it tough.

NBA.com: Is economic analysis open to interpretation or do the numbers generate one “truth?”

KM: In certain cases, it’s relatively straightforward. In cases like this, there’s more room for disagreement. All those moving parts, people can put them together in different ways. Everybody has their own vested numbers, so everybody shapes their numbers in their own direction. If they think ‘it’ could be between 6 and 12 and 6 is good for them and 12 is good for us, they’ll say 7. That’s not like making stuff up, that’s just saying, ‘I’m going to be cautious.’ I usually try to say, ‘I can’t tell you for sure, but it’s going to be between 6 and 12.’ What’s the consequence if it’s 6? What’s the consequence if it’s 12?

Sometimes I see things differently that maybe they haven’t thought about. Hopefully that will help move the needle and help move their position a little bit. But my biggest role is to keep my side informed and tell them, ‘If you agree to this, here’s what’s going to happen.’

NBA.com: Many people understand that NBA players as a select group of specialized, highly skilled workers. Are there many many instances, though, in which labor commands more than 50 percent of an industry’s costs?

KM: In certain sectors, there’s a ton. You go to a law firm, most of its cost is labor. You’ve got to remember, labor is 60-something percent of the economy. In the service sector, it can be much higher than that. And these people really define the product. These are the ones people come to see.

What separates the NBA from a different basketball league? Well, it’s the players. The basketball’s’ the same, the court’s the same, it’s the players who really are the distinguishing feature. That’s not to say that the league doesn’t have value. But the defining characteristic and the scarce resource, if you think about it from an economic point of view, is the talent. It’s not unlike Hollywood, the music business or any of the other ones where the thing that distinguishes one person from another is the talent.

NBA.com: One effect of equalizing payrolls is you incentivize good players to go where the money is available. But another might be paying good money to players who might not deserve it, just because more franchises have to spend on … somebody.

KM: That’s a problem. The other thing is, there is some relationship between pay and success but it’s not nearly as strong as people think it is. Even if you were to completely equalize pay across teams, there still would be an enormous variation in strength of teams. In a statistical sense, the level of payroll of a team explains somewhere like 5 percent to 10 percent in the variation in outcomes.

NBA.com: That’s all?

KM: That’s it. I did a little experiment. All you have to do is take the overall distribution of win-loss percentages. Let them tell you what they think the relationship between salaries and wins is. They tell you ‘This much spending is worth this many wins.’ So then you take everybody’s salary down to the mean or up to the mean. Then if you tell me you get an extra win for every $3 million you spend, I’m going to give everyone I’m moving up an extra win for each $3 million. Everybody I move down, I’m going to give one fewer win for each $3 million.

NBA.com: And?

KM: The relationship between salaries and the number of wins in a season is positive, but it’s pretty weak. It certainly is not going to have a dramatic change in the distribution of outcomes. It might change who the winners are and who the losers are, but you’re still going to have some teams that are much better than others. Because some people spend their money much more wisely than others do.

Leave A Comment

Comments are moderated and generally will be posted if they are on-topic and not abusive.

 

COMMENTS: 11

View All Comments »
  1. Jerrod says:

    Of course Mr. Murphy, as a member of the negotiating team for one side, is engaging in fallacy-as-science promotion. Everybody with a casual knowledge of the NBA knows that bad players get WAY overpaid, others get bought for expiring contracts and never play (but their salaries count in his example, I imagine), etc. So using his bad example of NBA salaries = wins has to be more effected by the bad salary system moreso than talent. Not that I care about the players or the owners for that matter. I don’t really care if the NBA ever plays again.

    Thumb up 3 Thumb down 3
  2. mfw13 says:

    The problem for both the NBA and its players is that several substitute products are readily available and just as enjoyable to watch….college basketball, high school basketball, women’s basketball, and international basketball for starters, as well as many other sports.

    I live in a city that has survived the loss of the NBA just fine (i.e. Seattle), and many other cities have done so as well over the years (Vancouver, San Diego, Kansas City, Buffalo, just to name a few). Not too many people are going to miss the NBA, especially given that the league is dominated by a handful of superstar players, thus giving most teams absolutely no shot whatsoever at winning the championship. College basketball is a much better product anyway, and a lot less expensive to boot.

    Well-loved. Like or Dislike: Thumb up 10 Thumb down 2
    • bob says:

      women’s basketball, seriously?

      Well-loved. Like or Dislike: Thumb up 8 Thumb down 0
    • frankenduf says:

      ‘problem’ for the NBA?- dude, on what planet is $4 billion in revenue a problem??- ur substitute list is a fail because the same exists for every other sport!- and ur critique is that people don’t like the nba because of dominant superstars??- lol- uve obviously never seen lebron take over a game with masterful talent and power- oh, and don’t forget air jordan sneakers- as opposed to, oh, what were those sneakers that the other sports’ players wear?- crickets

      Thumb up 2 Thumb down 2
  3. paul o. says:

    The WNBA’s season is over so it isn’t a substitute good.

    However, there are many substitute goods for sports: theater, cinema, restaurants, strip clubs, etc. Pretty much anything that’s entertainmant, whether it’s a sport or not.

    Hope the NBA season is cancelled so the public is less willing to build a new stadium in the future.

    Thumb up 0 Thumb down 0
  4. Mike says:

    If you took the salaries of the highest fiver players of each team and compared this with the number of wins, I suspect there might be a larger correlation.

    For example, a team with several high paid superstars might tend to have some really low paid scrubs on the bench. If you don’t have high paid superstars, you might have more of a bench of mid-priced talent. If this is the case, the teams might not have that much of a difference in overall salaries.

    Also, the current system has some type of salary cap and/or luxury tax. This would tend to even out the salaries of each team.

    Thumb up 0 Thumb down 0
  5. Kiaser Zohsay says:

    I would like to see a similar statistical analysis comparing salaries to ticket sales, merchandise and TV ratings. I expect that the correlation would be much higher.

    Thumb up 1 Thumb down 0
  6. Tony P says:

    “The relationship between salaries and the number of wins in a season is positive, but it’s pretty weak. ”

    What about when you remove the Knicks from the calculation? Or, both the Knicks and Nets?

    Thumb up 0 Thumb down 0
  7. LAD says:

    There is a statistically significant correlation between state/local income tax rates and team records. In a system that has a maximum player salary, the teams in a low or no tax states can offer free agents more money on an after-tax basis. If the league wants to make more teams competitive, the maximum salary should be set on an after-tax basis rather than a before-tax basis.

    Thumb up 1 Thumb down 1
  8. Paul A. Meland says:

    How valuable is the talent if they don’t have a venue and organized structure to play in (the NBA here)? Players and the league need each other. What is the value of most the NBA players in a traditional corporate job? Talented as the players may be, a very narrow talent.

    Thumb up 0 Thumb down 1