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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 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: 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. 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.’ 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. 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. 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. 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.