As hair grows from the sheep, the scaly fibres of each strand point out in the same direction. Lanolin helps in keeping the hair slick which prevents the locking of those fibres. Most, or all, of the lanolin is removed from wool when processed. So when the sheep’s hair (wool) gets woven together, all of those strands and fibres point in different directions. When the woven wool gets wet, then dries, those opposite-pointing fibres latch onto eachother and lock closer together (pulling tighter) – as there is no lanolin to prevent the locking.