More Than They Collectively Bargained For

Major League Baseball’s labor market is unlike any other. Seven billion dollars of revenue enter baseball’s coffers annually, and while nearly half goes to player salaries, the vast majority of that is skewed towards the 25 percent of major-leaguers who have at least six years of service time.

Andy Van Slyke once told our own David Laurilia, “I think that baseball, at its core, is the purest form of capitalism that we have in our society.” For an economist who also admired Van Slyke growing up, hearing that statement aged my heart a few months. Fewer statements could be further from the truth. Between the artificial oligopoly limited to 30 teams; a draft determining which one of these 30 teams is allowed to employ players for the entirety of most of their careers; and the reserve clause, baseball’s labor market is largely an artificial remnant of the Collective Bargaining Agreement that’s in place.

The baseball labor environment might seem divined by God, but when that economic ecosystem evolves, the game mutates too. Certainly there are some components to this CBA that will change the value of a win, and that will drive up salaries. I’ve shown before that a second wild card will increase salaries, essentially because the median difference between the first and second place wild card teams since 1996 has been three games — while the median difference between the second and third place wild card teams has been 2.25 games. The new format will make the odds of a pivotal win more likely. Winning one’s division now doubles the odds of making the playoffs, relative to a wild-card-game appearance. Dave discussed the implications of this on the value of a win last week, as well, using the curve that measures win value. This is a pretty good deal for players.

Unfortunately, as I explained earlier, owners managed to depress salaries comparably using new draft pick compensation rules, just as they did in the old compensation rules. On the other hand, when you add the effects of the second wild card and the increase in Super-Two arbitration eligibility, the players still netted themselves a pretty good deal.

The real difference in the game’s economic environment came with bonus suppression for draft picks and international free agents. This is where the owners won handily. If teams paid for all players like they do players with six years of service time, they quickly would go bankrupt. Players with at least six years of service time are incredibly valuable, because there is such a shortage in their supply– and that is only because of the restrictions placed on players with less than six years of service time. With more players locked up, every year there are several teams in a position where they are already close to contention when free agency begins, which makes those teams open their wallets.

The real value to owning a major league team derives from the monopsonistic power that owners have on players before reaching free-agency. Noticing this, agents have begun negotiating higher and higher bonuses for draft picks and international free agents. The new agreement will lower the amount that teams need to spend to acquire this monopsony power over a player.

The current MLBPA members don’t care about this, because that money isn’t coming out of their wallets. The value of unions is a highly politicized topic, but basic labor economics has a less polarizing judgment — unions lead to more efficiency if employers would otherwise have more market power than employees. Obviously, baseball fits that bill. But when union members bargain on behalf of non-members, they have no incentive to show them the money. Simply put: the players might have won the other negotiations for themselves, but they did so at the expense of future major-leaguers.

I don’t think that this will actually harm the game’s overall talent level by a significant amount. These changes seem to be making the biggest headlines, but I’ll go on the record and say that the supposed giant sucking sound of talented players leaving baseball and going into other sports is widely exaggerated.

An individual player who is comparably talented at baseball and football or basketball knows that the latter two sports will not let him enter their draft at 18 years old, while baseball will. If a player is looking to get money as soon as possible, he’ll play baseball. Football has much more revenue than baseball, and baseball has much more revenue than basketball, and since the players received roughly half of revenue in each sport, the total payroll of each league is very different from the other two.  In the linked article, Maury Brown lists the league-wide revenues of the major three sports in 2010 as:

Football: $9.3 billion

Baseball: $7.0 billion

Basketball: $4.7 billion

When you consider that there are about 12 basketball players on 30 teams, 25 baseball players on 30 teams, and 53 football players on 32 football teams, we get the following revenue per roster spot:

Football: $5.5 million

Baseball: $9.3 million

Basketball: $13.1 million

Not only that, there are four levels of minor league baseball that a player could pass through before reaching the major leagues. Upon getting to the bigs, the player won’t really even get paid until he hits six years of service time. When you consider that only half of the players picked in the first two rounds of the draft ever play a major-league game, the revenue per draft spot in baseball is far below that of football and basketball.

A prospect will only choose baseball over football or basketball if they are much more talented at baseball (enough to justify the lower average salary per player), or if they need money at 18 years old. Both the NFL and NBA now forbid teams from drafting 18 years old, while the MLB does not. Lower bonuses aren’t going to alter either of those things. They might change the minds of a couple of guys — and that definitely could encourage a few high school phenoms to pick up a college education before signing with a major-league team. But this isn’t anywhere near enough to change the league-wide talent level.

This CBA facilitates a transfer of money from future draftees to owners, but they’ll still come to play. And if they do choose baseball — and they make it to six years of service time — they will have a great deal in place. Perhaps by then, they’ll even get rid of the taxing draft-pick-compensation rules as well.