Efficiency Wages

100 years ago, Henry Ford announced “the five dollar day,” drastically raising the price he was willing to pay for labor at his car company. While a pay raise for a lot of employees is generally not the first thing you think of when you want to cut costs, Ford generated significant savings for his company through the move by reducing absenteeism and turnover and motivating his staff to earn one of the coveted spots. He later called the wage increase the “finest cost cutting moves we ever made.”

This is the classic example of the theory of efficiency wages (whether Ford actually intended to follow this theory or not is up for debate, but doesn’t really matter for our purposes). The idea is that, by paying more than the market rate for labor, you can attract higher quality talent and increase the overall productivity of your staff enough to offset the differences in cost. Why am I talking about efficiency wage theory on a baseball blog, though?

Because earlier this week, Major League Baseball announced that they had approved a measure to raise the per diem for minor league players from $20 per day to $25 per day. And they think the 21st century “five dollar a day” plan is good enough. It’s just not, though.

I won’t bang the nutrition drum, which many others have done before me. That teams should be providing healthy meals to their minor leaguers seems obvious, and it continues to amaze that they don’t do so. But beyond just the nutritional aspect of the low per diem, I have to wonder why no team has yet tried to take advantage of an efficiency “wage” by drastically improving the quality of life of their minor league players.

At this point, nearly half of all minor leaguers are international players. These players often sign as teenagers, and then spend anywhere from 4 to 8 years bouncing around through the organization’s minor league affiliates. While we tend to think that players decisions on where to sign are only affected by the signing bonus they are offered, there are clearly other incentives in play.

Quality of life matters, especially to someone who will be spending years on buses, traveling from small town to small town. If every team is offering the same lifestyle in the minors, then the decision really will be all about signing bonuses. But I’d suggest that it may be far more economically viable to offer an across-the-board upgrade for how minor league players are treated.

Rather than offering an extra $100,000 to one sixteen-year-old, buy a nicer bus. Instead of getting into a bidding war for a middle reliever that you don’t need, build a housing complex near your spring training site, and then hire a cadre of personal chefs to crank out high quality ethnic food to ease the transition. And yes, raise the per diem for these kids, so that they’re not left choosing between Burger King and McDonalds for lunch.

Major League Baseball is a big money industry, but at the minor league level, everything is done on a shoestring budget. It doesn’t make sense. It’s time for someone in MLB to put some efficiency wages in play.