eThesis - School of Business electronic theses

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Purpose of the study:

The aim of this study is to introduce North American major sports league salary cap systems. I summarize the development and the history of job market regulation in professional team sports. Different types of salary caps and leagues are presented to create a comprehensive understanding about the topic. The theoretical implications of a salary cap are presented based on previous literature. Previous studies suggest that a salary cap has two main motivations: to balance the competition and to lower player costs. In the empirical part of the thesis I keep my focus in the National Hockey League (NHL). I test whether the consequences implied by theory are consistent with the results in the NHL after the introduction of the first league-wide salary cap in 2005. My aim is to find out if the competition has balanced during the regular season and during the playoffs. Additionally, I examine consequences of lower player costs to the team owners and to the players.

Data and methods:

Data on player salaries is collected from the USAToday website which has gathered NHL player salaries since the 2000-2001 season. Yearly player salary data consists of 700 to 748 observations and in total the data set includes 9372 observations. Data on teams' success is collected from different statistical websites which are listed in the thesis. I use statistical analysis methods such as Gini coefficient and Herfindahl-Hirchman Index to examine and illustrate the differences before and after the salary cap.

Results:

The results of this study mainly support those suggested by the theory. Regular season competition became more balanced after the 2005 salary cap. However, competitive balance in playoffs did not grow, contradicting the theoretical suggestion. League-wide player costs decreased after the salary cap but the growth in salaries rapidly revoked the decrease. Income inequality did decrease. The most expensive players experienced the greatest cut in salaries and the lowest paid players experienced an increase in salaries. Differences in positional average salaries decreased and the valuation of players on their position standardized.