26

April

NFL Draft Economics: Draft Trading and the Rookie Wage Scale

How much would trading up for a player like Clay Matthews cost the Packers in 2012?

Ted Thompson and the Green Bay Packers have a lot of options in the 2012 NFL Draft with 12 overall selections, and they are probably going to need them with some of the defensive holes they need to fill.

Our own “Jersey” Al Bracco spent time presenting some First and Second Round trade-up scenarios that could possibly occur, and Thomas Hobbes looked into Thompson’s trading history in relationship to the Trade Value Chart (TVC).

A lot of people are wondering, though, does the old TVC still apply?

This will be the first draft under the latest Collective Bargaining Agreement (CBA) between the NFL and NFLPA, and it comes with a shiny new set of rules for a rookie wage scale. Though we haven’t had a draft under these restrictions on pay, the 2011 rookie class did feel the effects of it when they were finally signed.

Below is a comparison of the contracted salaries of the top 10 picks in the 2010 and 2011 NFL Drafts. The numbers shown are in millions of dollars, and for simplicity in numbers, only the guaranteed amount has been recorded. It’s not a perfect barometer of the wage scale’s effects, but it should give you a general idea of what has happened:

SEL #

2010 Contract

2011 Contract

% Decrease

1

$50.00

$22.00

56.00%

2

$40.00

$21.00

47.50%

3

$35.00

$20.40

41.71%

4

$36.75

$19.60

46.67%

5

$34.00

$18.50

45.59%

6

$29.00

$16.20

44.14%

7

$26.00

$14.40

44.62%

8

$23.00

$12.00

47.83%

9

$20.80

$12.50

39.90%

10

$17.50

$12.00

31.43%

 

As for how this effects the draft, there are three basic things that could happen: (1) it will cost more to trade up, (2) it will cost less to trade up, or (3) there will be no significant change in trading values.

At first glance, it would seem the cost for acquiring a higher draft pick should go down. The players are being paid less money, which on the surface might seem like they’re worth less. (No, not “worthless.”) This, of course, is not the case at all.

Let’s go back to our high school economics class and the Laws of Supply and Demand.

In our graph, the price P of a product is determined by a balance between supply S and demand D. This diagram shows a positive shift in demand from D1 to D2, thus resulting in an increase of price. In other words, one of our four basic laws is at work:

“If demand increases and supply remains unchanged, then it leads to higher equilibrium price and higher quantity.”

Okay, so this isn’t exactly a correct model to use in the case of NFL Draft trading, since you can’t produce draft picks and increase the quantity of what you’re selling. It does, however, serve as a nice analogy for what’s going on.

Essentially, the lower contracted cost of a high draft pick could spur more interest in teams to move up in the first round. Their pay is now less of a deterrent in risking future picks for a perceived talent. That means you could have more teams involved in the haggling of price for a specific pick.

The more interest a team gets in their draft spot, the more they can ask for in compensation, since the interested parties will all be looking to one-up each other. So just like our economic model, the increase in demand has generated an increase in price.

This all glosses over one small fact, though: the value of the players themselves hasn’t changed.

No, we’re still evaluating their skills the same way, and we’re still grading them on the same scales. Thus, it doesn’t really make a difference how much they’re getting paid when it comes to matching up talent for talent. The relative value of a player for a team is no different than if there were no rookie wage scale in place.

In fact, the trade value chart has probably been outdated for years now.

Back in the 1990’s, when Cowboys assistant Geep Chryst developed the infamous TVC, there was no salary cap in place. Money never factored into the equation. And as the years went on, the chart became essentially useless for the highest picks in the first round because the contracts became so bloated.

It’s part of the reason the rookie wage scale was set into motion during last year’s labor negotiations. Being last in record and first to pick was almost a losing proposition. Not only did a team have to shell out some serious dough for a pick that still carried some risk with it, but they’d be lucky if they could even find a team to trade it away to. No one wanted that burden.

Plus, some teams are going to trade for a player regardless of his expected contract. If they see him as an asset to the team and worth trading for, then the money becomes inconsequential.

So really, we may not see that much difference in the value teams place on their draft picks. But if anything does change, the values should increase towards the top of the draft, since there could conceivably be more demand for those players. The risk could be slightly mitigated without the threat of carrying a heavy contract for a “bust” pick.

This all really only makes the biggest impact on the first round, too. The rest of the players in subsequent rounds haven’t really been affected by the bulging rookie contracts, so there’s no reason to see much affect on them with the new wage scale in place.

I am interested to see how this draft will play out when it comes to trading players. We’ve already seen the Washington Redskins give up more than the traditional TVC would indicate in getting the second pick from the St. Louis Rams. But we’ve also seen those kinds of “imbalanced” trades in the past.

What seems like sound logic in theory does not always work out the same way in practice. The draft is a fluid process from year to year, so even our best predictions might hit far from the mark.

But then, speculation is most of the fun when it comes to the NFL Draft.

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Chad Toporski, a Wisconsin native and current Pittsburgh resident, is a writer for AllGreenBayPackers.com. You can follow Chad on twitter at @ChadToporski

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9 Responses to “NFL Draft Economics: Draft Trading and the Rookie Wage Scale”

  1. ThomasMagnumPI ThomasMagnumPI says:

    Nice article, Chad.

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  2. D4L says:

    Interesting analysis. I would add this: Your analysis of a static supply is completely accurate, thus your chart needs to change. At all prices, quantity is the same, so supply should be a vertical line (completely inelastic with respect to price). Thus, when we get a exogenous shock to demand, as shown, price increases by much more than if supply is at all elastic. So basically those top picks are worth even more than most people think. My guess is we see a lot more trading up until GM’s realize the value of those top picks and the market settles back down to equilibrium.

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    • Chad Toporski Chad Toporski says:

      You sound like you’re more well versed in the world of economics than I. Thanks for the input!

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  3. Ed Schoenfeld says:

    People seem to be forgetting two thing -
    1) Over the 20 years of salary cap football, teams have already changed their draft value charts from that Cowboys one that got leaked. Pro Football Talk put out at least one version of an adjusted chart (the top pick was valued at 2000 instead of 3000 points), though I have no idea if they keep material from 2008 available on their site.

    If anything, the restoration of reasonable risk pricing to the top end draft picks would take the ‘Draft Value Chart’ *back* to the valuations that existed before the salary cap era — i.e. the old Cowboys chart will become more valid than it has been for the past 15 years.

    Second, the old classic ‘supply/demand’ chart assumes that each item being supplied is relatively equal in value, and that demand for the item is relatively equally spread among the buying population. That is certainly not the case with NFL draft choices. The difference between the value of Andrew Luck and Mr. Irrelevant is pretty extreme. The difference between Luck and the 32nd player taken is smaller, but still measurable.

    The difference in demand is also very real, as the value of a 3/4 OLB is greater to Green Bay than it is to Chicago — see the Matthews trade from 2009 for an example of what that value difference could amount to. This factor also would tend to enhance the value of the higher pick (a la that Cowboys chart).

    What I don’t understand is why any of these changes would make the teams that pick early more likely to trade down (after all, that is what has to happen for a team that picks later to trade up.)

    Everything depends on the relative value of the actual player available to the team picking in that slot — the reason the Rams traded down with Washington is not because the second pick was somehow less valuable, it’s because the consensus Best Player Available on that pick was a franchise QB (RGIII), and the Rams think they already have that player in Sam Bradford, so they could get more value for their team by trading.

    So I don’t think you can say that the new rookie salary structure will change trading behavior — teams will still need to find ‘fits’ for individual deals, where one team sees more value in player available at the higher pick, and the team that trades out sees more value in getting more picks rather than the player they would pick in that spot (and who might still be available later anyway, a la Jordy Nelson.)

    For the Packers, I could see a move to get ahead of Pittsburgh and other teams that also run a 3/4, say a move up to 22 or 23, if the right player is still available that deep into the ‘run’ on 3/4 rush linebackers that will inevitably happen. I could equally see a trade down, say GBs 1st and 4th for a 2nd and 3rd, to get 4 choices in the top 100 players for better overall value.

    Fortunately, speculation will soon be over :-)

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    • Chad Toporski Chad Toporski says:

      Lots of good stuff there. I didn’t really want to get into the TVC changes over the years to keep things simple, though it is certainly an important point.

      I think I would agree with your comments overall. As I mentioned, the value of the player himself is, in a sense, unrelated to what he is going to get paid. Yes, where he gets drafted will affect that, but when it comes to what you will give up for him draft-wise, then it’s a different story.

      As for your comment: “…why any of these changes would make the teams that pick early more likely to trade down…”

      I think this could lend more support to the idea that higher picks will become more “expensive” in a trade. The teams aren’t going to give them up as readily as in the past, meaning they’ll demand more in return.

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      • Steve Cheez says:

        Perhaps you could follow up with a new chart based on your regression analysis?

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  4. Ron LC says:

    In the NFL draft you have a fixed (non-variable) supply. You also have a fixed (non-variable) demand. Add to that contractual price-controls.

    Never under any circumstance can you apply free market evaluative tools to analyze that totally controlled market.

    Enjoyed the attempt though. :)

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    • Chad Toporski Chad Toporski says:

      I suppose what I was hinting at in my article (after all the economic mumbo jumbo) was that the wage scale may really not have that much effect at all on the trade value of picks. Which, of course, would support what you’re saying.

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