Baseball’s Decelerating Average Salary
No surprise: player salaries are going up. But they’re not going up by much. This week, we learned that baseball’s average salary cleared $3 million for the very first time, and the minimum salary rose to $414,000. Craig Calcaterra noticed a helpful AP breakdown of the minimum and average salaries over the past 40 years. Craig’s main takeaway is that salaries have risen a lot over the past four decades, and that’s true. But an interesting trend emerges in the data: their climb has significantly slowed.
Because the minimum salary is set by the commissioner’s office, its rise has been herky-jerky — during 13 of the past 41 seasons, there was no change, and during another 8 of the seasons, the salary rose by at least 15%. For example, in 1990, the minimum salary increased to $100,000 — nearly 50% higher than the previous level of $68,000. In 2003, after remaining constant the previous four seasons, the minimum salary increased by $100,000, an increase of exactly 50% over the previous minimum of $200,000. The minimum salary tends to go up by windfalls rather than by increments, but the pace of its increase hasn’t appreciably decreased.
On the other hand, the change in the average salary has been steadily and notably decreasing. The average salary is still going up, but by a whole lot less than it used to.
This instinctively makes sense. The crazy Steinbrenner boom years of the 1970s, immediately following the birth of free agency, caused a salary spike that hasn’t been seen since. (I’m not sure how to explain the crazy outlier 42.5% jump in 1991; does anyone have any idea what caused that?) Salaries have generally increased since the ’70s, of course — with three minor exceptions in 1987, 1995, and 2004 — but their increases are getting smaller and smaller.
This year, baseball’s average salary increased to $3,014,572 from $2,996,106; that rise of $18,466 marks an increase of just 0.62% over the previous figure, the smallest percentage change since the average salary suddenly dropped by 2.47% in 2004. The average salary hasn’t increased by more than 10 percent since 2001, and the percentage change has decreased for five straight years.
Of course, all of this occurs in the context of a struggling American economy, but the slowing of salary growth is a trend that dates back far before the most recent recession. The scatterplot clearly starts moving downward beginning around 1980, and the trend has become even more pronounced since the year 2000. Y2K is a local maximum within the data, the year that the tech bubble burst and Alex Rodriguez signed a 10-year, $252 million contract that is still higher than any contract that any other baseball player has ever signed. 2001 was the last year that the average salary grew by more than 10 percent; this year, it grew by less than one percent. If the free-agent market could have a recession, this is what it might look like.
So what does this mean? For one thing, it means that the free-agent market simply isn’t as volatile as it once was. As surprising as the Jayson Werth signing seemed to many, people weren’t shocked by the dollars so much as by the team writing the check. Suffice it to say that there were no stunning $252 million contracts. The very fact that a “mystery team” not only emerged during the Cliff Lee sweepstakes but actually won the day suggests that, while the gap between the richest and the poorest may be widening, the acceleration may be shrinking. And that might not be such a bad thing after all.
Just economics to me.
After awhile, salaries can’t continue to climb faster than revenues. That’s an unprofitable, impractical practice.
Example, I work for an online ad agency, and had to convince that despite the iOS:Android impression ratio of 3:1 in June, to 2:1 now, that I didn’t foresee Android’s US share passing iOS until early 2012. There has to be an equilibrium point between them.
The same thing holds true here.
I think you’ve hit it on the head. Initially, increases were big because there was a big gap between salaries and value. The increases reflect the equilibrium along the “salary/value” asymptote being approached.
Put another way, it’s the law of diminishing returns. As salaries approach value to the clubs, the dS/dT fades.
This is an interesting counterpoint, I think, to the prevailing notion that the “winner’s curse” will invariably drive free agent salaries past the breaking point. To the contrary, free agent salaries are actually approaching something resembling equilibrium.
but revenue has been increasing faster than wage for a while now
“Just economics to me.
After awhile, salaries can’t continue to climb faster than revenues. That’s an unprofitable, impractical practice.”
I think that’s right. Ticket prices can only rise so high in most places, since your average fans’ salary hasn’t been rising all that much over the last 15 years. I know that ticket prices are only part of the revenue stream of MLB teams, but it is an important part.
The counter to that is that baseball is still the best deal around, even in major markets like Los Angeles. What has seemed to go through the roof is what surrounds ticket prices, like the cost of jerseys and the like.
“(I’m not sure how to explain the crazy outlier 42.5% jump in 1991; does anyone have any idea what caused that?)”
Alex, I found this article while researching a post a few weeks ago that may shed some light on your question.
http://sportsillustrated.cnn.com/vault/article/magazine/MAG1136049/1/index.htm
Sounds threefold.
1) A new TV contract signed before the 1990 season, worth $1.48 Billion for 4 years.
2) 15 players including Jack Clark, Chili Davis, Brett Butler, Gary Gaetti and Dave Smith were awarded free agency as part of a collusion settlement.
3) A couple of teams were giving out big deals to start the winter meetings and other teams panicked and followed suit. With an influx of talent due to the collusion settlement, the contracts got out of control (for the time).
Fascinating — thank you!
Yes, it looks like the ’90-’91 years saw a pretty big boom in profits. Real TV revenue nearly tripled going from 1989 to 1990, also ticket prices increased, as franchise values tripled. So I can see how after the 1990 season teams became very competitive trying to spend that cash. This also started the time where teams were basically spending ~50% of revenue on salaries. The percent of revenue spent on salaries jumped by about 1/3 from 90-91, on it’s way to the roughly 50%, or a little more, mark we’ve been holding for a while.
So, this transition of sending more revenues to players has happened, and we’ve probably reached a point where the organizations may not really be able to afford sending more to players. Thus, we just have to wait for revenues to grow. And as MLB presumable increases its ability and efficiency in tapping the market, the harder it will be to come by the next marginal revenue increase.
So, may have just reach a new equilibrium point, where inflation adjusted salaries will stay roughly flat, until the next restructuring of MLB’s pay scheme, or until some great change in the dynamics of the sports market takes place (such as a large shift in popularity or large scale movement of franchises).
“or until some great change in the dynamics of the sports market takes place”
Or expansion to 32(+) teams… +6% revenue, +50 players, +6% competition for FA. (Doh! Will it be Bud’s final ‘gift’ to the game after expanding the playoffs again?)
@merizobeach
would that be so bad? adding two more teams would finally let schedulers separate the two leagues and be able balance the schedules. with two leagues of 16 teams each, you could even get rid of divisions, and just let the top 4 of each league make the playoffs. having each team play every other team in their respective league 10 times and leaving 12 games for interleague play would make it much fairer than it is now. or maybe im being overly optimistic…
Probably more the “real” increase in revenue than the “overbidding” story because salaries increased 20% the next year, suggesting that players were still making up lots of ground.
I would assume that the 1991 spike was a natural offshoot of the 1990 increase in the minimum salary; it appears that the two percentages are roughly similar. The minimum salary took effect in early 1990 (after the lockout) but presumably didn’t affect players under contract until those contracts expired, some of which did so at the end of that season. Therefore that objective benchmark first came into play in negotiations for contracts in 1991 and after.
Any agent worth his salt would argue that a player who was worth 5x the minimum salary before was worth at least that same mulitplier — since the minimum went up by around 50%, so should his salary.
I’m just speculating, but I think it makes sense.
Other minimum salary increases haven’t had nearly the same effect on average salary. The two don’t appear to be correlated.
on a slightly off topic note: the red sox, as of right now, have the highest payroll in baseball. by the beginning of the year, the yankees’ will be higher i assume, but as of right now, the red sox have the highest payroll in baseball. remind me again why they are supposed to be underdogs?
They aren’t and haven’t been underdogs in the past 5 years. The “Red Sox are blue collar underdogs” meme needs to die already.
I don’t think (and hope) many fans believe that, although the Sox are usually underdogs of a sort against the Yankees. Boston also has a lot of money coming off the books after 2011 with a much different free agent landscape.
Assuming they do lock up Gonzalez, the entire infield and outfield (assuming Lowrie and Kalish replace Scutaro and Drew) is under contract. Salty could become the long-term catcher. Lester,Buchholz,Beckett, Dice-K, and Lackey are all signed. The only holes for Theo the next few years could be middle relief and a DH, which could also be filled with a platoon/bench.
They sat out in 2007,2008, 2009 in terms of major acquisitions (aside from Lackey). This is probably the most exciting offseason they’ll have for another 3 or 4 years as the payroll declines again.
Also, I don’t believe this “fact” is in any way true, despite the fact that Buster Olney sent it out in a tweet.
The Yankees payroll is still higher than the Red Sox right now (even if you estimate Papelbon’s arb raise). Crawford, Gonzalez, and Jenks didn’t add that much in payroll (Crawford has a low salary in year 1). If there’s any proof otherwise, please show your work.
Olney tweeted this? I’d love to see that calculation.
http://spreadsheets.google.com/pub?key=tz8qHiYrIzlFtVnly7gibjw&output=html
http://spreadsheets.google.com/pub?key=tpQLwiiQL4kzEzLhsUqVjLQ&output=html
Cot’s lists the yankees 40 mil ahead before arb hearings. I doubt Boston will make up that ground.
I refuse to believe Buster Olney is ever wrong. You can use facts to prove anything that’s even remotely true.
I have to say, while you can fit a linear trendline to that data it doesn’t look at all appropriate to do so. I am not seeing a clear “descending trend.” What I am seeing is something that looks an awful lot more like a hump-shape centered around 1980. This makes intuitive sense, what with that being the phase-in for free agency. Beyond 1986, it looks mainly like a bunch of noise centered around 10%, in my humble opinion. Considering the level of “deceleration” over that period is quite small compared to the overall noise, I would hardly even call that a trend.
Additionally, even if salaries “only” grew at 7% per year that could be an unsustainable situation. Since we’re talking 7% based on the prior year, that’s exponential growth. With inflation around 2-3%, and real GDP growth typically around 3%, any additional growth would have to come from either taking a greater share from the owners or increasing the share of baseball in the economy.
The fact that salaries are growing closer to 10% would seem to indicate that baseball has done quite well over that period, better than the economy as a whole. With that said, I would expect something more like 7% or 8% annual growth in salaries to be a more realistic long term mean than something like 10% or higher. Though there might be factors I’m not considering, such as the sheer population growth of the spectator population leading to higher potential TV revenues (i.e. same number of players, more fans => more money available per player).
At some point, baseball salaries cannot grow faster than the economy in general, because baseball itself cannot expand to take on an arbitrarily large % of the economy. This might sound obvious, but it’s a point missed entirely by a lot of salary-based analysis at this site, which happily project 5-10% salary growth into the future forever.
While it is possible that baseball salaries will outpace the general economy for a given time period, that would mean baseball will likewise have to be booming (or setting itself up for destruction through unprofitability).
Actually, that is not necessarily true for players. GDP growth is often measured per capita. Since the total population is growing, but the population of pro players is not, you’d probably expect their salaries to beat the total economic growth. The question is by how much.
So think of this scenario:
- People in the US show per capita income growth of about X%.
- The population grows at a steady rate of Y%
- The % of population putting money into baseball (and the % of their money they put in) remains constant. And that players get a constant percentage of these revenues. Let’s assume a term C that represents the product of these: C = Fraction of consumer spending that goes to players.
- The number of total baseball players is basically static between about 750 to 1200 (30 teams, 25/40 man roster, to round up fairly high). Let’s call this N, a constant.
So the amount of total money for all the players is around:
Player Total Revenue = C*( X_0*(1+X)**t * Y_0(1+Y)**t)
where X_0 is the current economy per capita value and Y_0 is the current population size (the capita, if you will).
The total money for each individual player is split out of that value. Let’s assume that we only care about the average (mean) player, so you can just divide the above by N if you like:
Avg Player Revenue = (C/N) * ( X_0*(1+X)**t * Y_0(1+Y)**t)
If the number of players was growing at the same rate as the population (i.e. N(t) = N*(1+Y)**t), the revenue per player would go like this:
Avg Player Revenue = (C)(Y_0/N) * ( X_0*(1+X)**t)
In that case, you’d see player salaries move with the economy. By that’s simply just not the case. Likewise, if population growth was stagnant, you’d see the same thing as if the number of players increased proportional to the population.
Again, this makes some very significant assumptions that may not be founded. In particular, it’s unrealistic that more people will necessarily lead to proportionally more total spending on baseball. But one could make an argument that player salaries would be expected to beat general growth of the economy, provided that baseball can get more total fans without increasing its overhead. (Which I can’t see why the overhead would increase, all told… It doesn’t cost you any extra to broadcast to more people)
Thta’s assuming a constant number of teams/players, something which has not been the case since 1969 – every so often, wisely or not, baseball expands the number of teams, typically to match new expansions in population (Arizona, Florida, Texas).
US population/number of teams
1960 – 180 million – 16 teams
1970 – 200 million – 24 teams
1980 – 227 million – 26 teams
1990 – 250 million – 26 teams
2000 – 281 million – 30 teams
2010 – 308 million – 30 teams
MLB has kept roughly 1 team per 10 million people in the US (counting Canada, jsut add 10% to the population numbers) since they spread around the country from the East. I’d expect this to continue in the future, and hence to see the total money pool per player to remain relatively constant over time. While restricting the number of teams to 30 would be a good longterm move for the existing owners, the shortterms benefits of expansion for them (piles of $ all at once) is typically too much to ignore.
Definitely a good point, though I’m hesitant to say that expansion will continue to keep pace with population. Given the current issues with some of the new expansion teams (cough cough FLORIDA), I would think the league might instead just end up shuffling teams to new places.
The other aspect is also opening to new markets – TV revenue doesn’t have to be limited to the USA, if there was interest abroad.
Jake Taylor would’ve killed to had the minimum be $414,000 when he played.
Unfortunately, he was making the minimum before the big jump.
I wonder, being the post steroid era, part of the impact over the last 5-7 years is due to a greater % of older players finding themselves out of work a year or two earlier(and being replace with more min salary contracts),or getting significantly lower salaries because the age dropoff is more pronounced?
Essentially if you have a shorter average career span, a greater % of the average career is spent in the cost controlled years. It might be interesting to see how average career span, or even average age looks over the last part of that graph.
“while the gap between the richest and the poorest may be widening, the acceleration may be shrinking. ”
The gap betwen the richest players and the average players salary is widening and accelerating.
GM’s have figured out that the value of a league average player in free agency is not much relative to a cost controlled replacement player. So they offer less than the 4 million per WAR that is reserved for the few elite players, knowing they have a cost controlled replacement player as an option and that this option will only cost them 2 wins (so big deal, they win 73 games instead of 75 games).
Not sure what its going to take for the younger players to realize that their system going forward will only work for the elite players (less than 5%). Time to end slavery for all players. The prime years of the typical league average player are the first 6 years between 25-31 when they are paid a fraction of their value. After 31, they are deemed to be in their declining years and too old to get a multi-year deal.
If everyone was a FA after their 1st contract expired, the average salary would still be 2.7 million per WAR, but the gap between the elite and league average player, and young vs old player will close.
Abraham Lincoln freed all the slaves, and not just slaves who worked as slaves for 6 years.
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Here’s one other question on the 1991 spike: what does your deflator look like for that year? I do a lot of financial analysis, and often use two or more deflators to test that findings don’t merely reflect the particular inputs that go into a particular cost-of-living adjustment.
As an aside, has anyone thought of developing a “baseball price index?” We know (courtesy of Baumol and Bowen) that enterprises like baseball, art museums, colleges, etc. are prone to the “cost disease” because they are labor-dependent, meaning that overall costs will increase on a curve that approximates per capita income rather than responding to technological improvements. We also know that baseball’s use of certain other inputs is periodic (they access utilities in the summer, when electric rates are high but gas rates are low) or nonexistent (the wholesale price of Hebrew National probably matters more than the retail price of a head of lettuce). A Baseball Price Index would be a useful contribution to change over time analyses such as this one.
As far as owners being able to grow revenues, there has been a tax payer financed stadium building boom for the last 15 years or so. Seems like this avenue may be pretty well dried up for the next couple of decades.
I have been looking into salary data also. A few things to note:
The salaries you have listed come from the Players Association. Other sources, such as CBS Sportsline and USA today, have different salary numbers (http://www.cbssports.com/mlb/salaries/avgsalaries) (http://content.usatoday.com/sportsdata/baseball/mlb/salaries/team/2010). Both of these sources have had the players making over 3 million a year for the last 3 years. I do not know which are correct (though percentage increase is similar in each)
Secondly, as an earlier commenter pointed out, I don’t know if it’s useful to compare the 1980s and 70s, etc. against today’s numbers. These MLBPA numbers show salary increasing by 59% from 2000-2010, or about a ~4.4% annual increase. The last three years have all been well below that… so I would agree with your general conclusion, with the caveat that this year seems like it may result in a larger % increase.
I think assuming 5-6% salary inflation on a yearly basis going forward is pretty dumb. I would expect 3-4% to be more the norm.
Do Sportsline/USA Today measure salaries after bonuses are paid or before? I’m sure the MLBPA is using base salaries.