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.
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Two things, Dave – One, in real-world applications, efficiency wages only provided a short-term burst in productivity before hedonic adaptation kicked in. Two, much like teams busting slot forces their division mates to follow suit, leading to no long-term competitive advantage but higher costs all around, such a move would provoke similar responses, and we’d again have things decided by signing bonuses, but with the teams bearing higher development costs. Now, I don’t know how long of a lag period there’d be, or how much benefit leading teams could exploit during it, but it’s very difficult to gain a long-run competitive advantage in this fashion.
I think there is a slight difference, though, in that a higher quality of life might directly correlate with a higher quality of play.
Example: I know for a fact that the less stress I experience on the way to work, the better I am that day at work, generally. If I get up at 6, get to the office by 7:30, get a good breakfast, I’m productive. If I oversleep a little (say 6:30), hit a 90 minute wall of traffic, take until after 8:30 to get to work while chugging coffee on the way up, well, I’m a mess.
Why not spend a little extra so your minor leaguers can have the former instead of the latter?
I don’t disagree with that – I think I got caught up in the competitive advantage angle while ignoring the fact that it would still be a good idea on the whole.
You are right on that eventually the efficiency wage becomes the expected.
Another real life example: out of college, if someone’s offered $40K / yr, it sounds absolutely awesome given they’ve probably never earned 1/2 that in a year.
10 years later, $40K / yr* would be met by the same person with the reaction “How will I put food on the table?”
*obviously not inflation adjusted.
Like you say, the “happy factor” would wear off after awhile.
Exactly – happiness is more about reference points than any absolute level of wealth or income.
We’ve just summed up about two-thirds of my behavioral econ class. :P
Perfect example: Louisiana was recently rated the happiest state in the union, CT and NY were next to and 3rd to last.
As the saying goes, “Money doesn’t buy happiness”.
(to be fair, Michigan was in last place).
Yippee! Another reason to love living in Michigan! Good thing we’ve got great sports to make us forget. Oops
I have long wondered about this ever since I saw the “meals” that my friend ate in the California League – I was eating much better as a starving student who was renting a room with a microwave and mini fridge.
I can see the argument that the teams might mention, that after a certain number of years they can only protect so many people on their roster, and their expensive meal and nutritional program would only be benefiting other clubs, but it still seems strange. Many teams have made lots of improvements to their language and culture programs over the years, you would think that nutrition would follow.
I also feel for the 17 year olds minor leaguers who get called out by the media for being “soft” and not “hustling”. You try beating out a grounder with nothing in your stomach but Sonic and Arby’s.
To be fair, some of these 17 year olds are placed with host families, so they are getting a nutritious meal.
Higher development costs may not be a bad thing, though. If players with good nutrition and housing conditions are more likely to improve, then the current system may well be stunting prospect development relative to potential.
I remember my $20 a day college road trips: $5 for breakfast, $7 for lunch, and $8 for dinner. That means a McDonald’s value meal for breakfast, perhaps a Ryan’s Steakhouse saturated fat fest for pregame and 5 items off the Wendy’s value meal for dinner. Then, $2 left over to play cards at the hotel. Very healthy.
The beauty of club rugby in college was getting the time to work and have my own $ to spend at tournaments.
I’ve seen a number of writers approach this argument in this way, and there is a basic logic behind it.
But I can’t help but feel it’s a little too generalized; this is painting with broad strokes rather than looking a little deeper at the issue.
For instance:
A certain percentage of minor league players on on 40-man rosters. The rules are different for them, and I wonder how so.
A certain percentage of minor league players are MLB vets on minor league contracts. I don’t think that these players necessarily live solely on the per diem. Many are smart enough to know that their performance is helped and hindered by diet.
Another group of minor league players aren’t on the 40-man roster but are “bonus babies.” Does anybody think the Red Sox aren’t making sure that Casey Kelly is getting good nutrition – or perhaps Kelly himself is.
Who is left in the minors? Career minor league players, fringe prospects and maybe some guys that have some real talent but aren’t getting a chance. I’m not sure the return on investment is necessarily so great that revamping the dietary structure is a slam-dunk.
I’m also guessing that just as with advanced statistics, different teams would and have pursued this aspect to differing degrees. I wish we could get a team official, even anonymous, to talk about what was studied – I’m sure that at least some teams have considered the possibility.
And who is responsible for minor league per diems? Minor league teams are not necessarily owned by MLB team owners. While MLB is a big business, MiLB is not necessarily, and outside of a few places (Pawtucket Red Sox, for instance), I don’t think these owners are getting rich off their teams.
I like the idea of improving diets for players (and for everybody), but I think that the topic deserves a little more effort than the obligatory comment that $25 is hardly enough to build and sustain top athletes.
This gets to a basic problem with most franchises. They view players as liabilities, not assets. For most teams (leave the Cubs out), attendence correlates best with winning. Increased attendence leads to higher revenues. But most teams give poor attendence as a major reason they can’t afford to spend. A very few teams (the Yankees come to mind) understand that if they spend, they win more, if they win more people come to the ballpark and they make more money. Even beyond that, if they win, more people watch on TV and they can demand higher broadcast fees.
Now, a $200 million dollar payroll isn’t the only path to success. Maybe it’s not the best one although it seems to work OK in New York. You have to spend wisely and you still have to identify and develop some talent. The better you do that, the less you need to throw money at a problem. The Rays and Twins seem to do it the best. The Red Sox have learned a sort of “balance” although about 25 other teams would love to have that budget. There is a minimum threshold, below which it becomes very hard to field a decent team. The money lets you fill holes more easily and not worry so much about bad contracts. It also helps with depth.
To many teams feel “If they come, we will build it.” and don’t understand why they can’t remain competitive.
$25 sounds like plenty to me. Say you had a wife and 2 teenage boys. 4 people, $100 a day, $36,500 a year? The average person in this country can’t afford that. The median household income in this country isn’t much more than $50k.
I understand these are growing young men. Sounds like giving them some home ec classes to help them plan and budget meals would help.
You’re not thinking about this correctly. The $25 is the per diem when they are on road trips.
It’s easy to prepare meals for that if you buy the raw ingredients and cook it yourself. The cost also does not increase linearly per extra person. I can make an extra portion of a meal for almost not extra cost more often than not.
That’s all beside the point though. When you are on the road, you can’t cook. You’d be lucky to have a microwave and a mini fridge in your hotel. You don’t have a car to go to the grocery store and shop. You are pretty much forced to eat out. $25 does not buy very much food at a restaurant at all, unless the food is spectacularly unhealthy.
Though I agree they should be getting more, I don’t know if that is 100% true. You can go to most diners and get a fair-sized salad and a drink – especially water like they *should* be drinking – for 10$ or so. Maybe a little more in certain areas. And most of the hotels they stay at probably have continental breakfasts, which often include fruit and yogurt.
I agree it isn’t easy, and they should probably increase that amount even more – maybe 40$ – but they would probably be better served with having a full-time nutritionist for every team in the minors.
Ah. Well, pack a picnic basket. Or, can you say $5 footlong? Beat up the bonus baby until he coughs up for some strip steaks and lobster cocktail. The team could just give them a spread for all 3 meals and no per diem.
OK, time for this curmudgeon to take a nap.
Down in the carolinas they should hit K&W cafeterias. You’d eat like a hog all day for $25.
Home ec classes aren’t going to help them if they’re stuck living in a hotel – they’ll still end up eating out all the time, just for convenience. And lets face it, most restaurants strive for tasty food, not food designed to optimize athletic performance. Combine that with the fact that many of these ballplayers are essentially college-age young men, what sorts of food do you think they’d most like to be eating? Combine poor access to healthy food with a lower desire for it, and you have a recipe for trouble.
One of the best things I saw working for a Short Season club was how all of their players get housed out with local families. The players then give portions of their per diem to their host families, and they get someone to cook full meals for them. I don’t know if this is common practice across short season clubs, or at higher levels, but I think its a great idea. I know that the care provided by these host families, provided by the quality of the facility relative to other short season teams made it a team that was fought over by MLB teams as an affiliate.
Was this team the Durham Bulls?
Oh, not that kind of hosting.
Granted. I was spacing the whole road trip aspect.
I’m sure a host family would send food on occasion with their players
Dave is absolutely right. If I may add one more thing, it’s the fact that work ethic and focus are so important to the development as a player – and these would be greatly aided if their quality of life were improved.
One of the major reasons that players don’t develop properly is because they get burnt out and lose their work ethic. When you stop focusing on developing your game, you won’t progress on to the big leagues.
The players we’re discussing are primarily young, immature kids. With years on the road in the minor leagues, it’s not the picnic that everyone thinks it to be. It requires tremendous focus and discipline to fight off the distractions and boredom. They don’t get paid a whole lot, they have a grueling schedule (72 road games in AAA, 144 total), and none are guaranteed careers. For many, it’s an enormous sacrifice.
I once had a conversation with a former elite prospect, Anthony Lachowetz. Playing in the Dodgers’ system in the early 80s, he was a supremely talented player – ranking as the #2 outfield prospect in the system, with all 5 tools and on the fast track to big league stardom.
However, he got tired of the lifestyle and watching his friends develop careers while he played minor league ball.
He could have had a tremendous career, but got burnt out and quit after posting his best season at Hi-A in ’82. This kind of thing happens far more often than people think. Nowadays, players don’t quit. There’s too much money, but they do get bored, distracted, and lose focus – which destroys their work ethic and development.
Like many things in life, it can look great on paper, when really it’s a nightmare.
The minor leagues needs to upgrade the quality of life for its players – at the very least to keep them happy and focused on baseball.
Lachowetz went .242/.337/.430 in the FSL at age 24, and was repeating (well, only 90 at bats the prior year, and he did better in cal league). He may have seen the writing on the wall. Maybe he could have kicked around a couple of more years and made it, but it would have been a lot of buses first.
Guy had a .360 wOBA as a 24 year old in A ball. Let’s not get carried away here.
I would agree that better pay for the minor leaguers would be a wonderful thing – but it would have to sound attractive to the major league club, and I can think of two things that make this fall short.
One is that, from the club’s perspective, if the club has to provide the motivation for the prospect, he’s likely not worth it. If his talent is so great that it is worth it, they’ll go above and beyond for him (and already do) – but they won’t do that for everyone. For all those marginal talents out there, the value is in if they are motivated despite the circumstances, not because of them. Also, the real motive is in the success they have at the major league level (giving them glory or money they seek), and nothing in the minors can compare to that.
I could see this being a way a team gets leverage and persuades better prospects to sign with them, but given the current system, it likely wouldn’t be considered worth the cost. Raise expenditures across the board for all minor leagues? Why would they when they can just pay that extra amount to be sure they get the player they want? And that’s just the international free agents – the vast majority of players come through the draft system which gives them exclusive rights to sign the players they draft. And if the lure of major league baseball and a fat bonus check isn’t enough to buy out a prospect’s college commitment, I doubt better minor league facilities and nutrition would make the difference.
I think that this sort of change would be the right thing to do, but I don’t think it would be more profitable. Unfortunately, this makes it unlikely for a major league club to make this or similar changes.
I dunno; while you can occasionally justify a smaller signing bonus by selling quality of life in the organization, I would guess that to the average 17-year-old who’s poor, hasn’t spent much time in the US and doesn’t speak much (or any) English, the immediacy and tangibility of a fat signing bonus will override just about everything else.
While it’s a great idea, the money would have to come from the parent club. There’s no incentive for the minor league team to put extra money into the players. If they do, and the players play better, they are bumped to the next level and no longer produce revenue for the team. From the parent club standpoint, getting the players into healthy habits would have long-term benefits by cooking for them at home and educating them as to what to eat on the road. If the player makes it to the major leagues, it’s one more competitive edge they have. If the player doesn’t make it, he will at least have been treated well, and may become an employee down the road or at least a fan of that club.
Excellent article Dave. Too often, employers think of cost in terms of money. But as you point out, the question isn’t just how much you spend. It’s how much you get for how much you spend.
Assuming that better living conditions would help your players develop better, stay healthier, etc., you could reap enormous gains in major league production with a relative pittance of investment. And that’s the real point.
Will Carrol has been making a very similar point regarding training staffs for a while now. Why would you refuse to pay the best trainer in the world the extra $100k he wants when that guy could be the difference in keeping millions of dollars worth of production on the field?
Organizations simply refuse, or neglect, to quantify the denominator. In this case, the question should be flipped: Hey major league GM! How much would you pay for _______________ improvement in the results you get from your minor league system? Would you rather have that or would you rather have Brandon Lyon instead of Joe Beimel?
BTW, did I miss the article where Omar Minaya loses the contest because he signed Kiko Calero to a minor league deal, and may do the same with Joe Beimel?
The Jays have been playing around with going “over budget” on the per diems since AA took over. They increased to $25 when it was $20, and I’m pretty sure they’ve gone to $30 now that it’s $25. Sure, it’s only five bucks, but I guess everything helps. I believe they’ve also hired a roaming nutritionist or two…
Linky:
http://minorleaguelife.blogspot.com/2009/12/per-diem-increase.html
I wonder if this same concept could be applied to a team’s signing of free agents. Say, if a certain team pays slightly higher than the going rate for FA players.
Of course, there are other factors to consider. But if you got a slight “bonus” when signing with a team, wouldn’t you be more likely to feel appreciated and perhaps work harder?
Except… that wouldn’t seem like a bonus – it would just appear to be a higher bid.
Good posting
Just to clarify some items. I do host a player in the short season NY Penn League. We dont ask for or recieve any of the players food money. As a host we arent even required to provide anything other than a clean place to stay and some family interaction. I dont believe they actually recieve anything other that a meager salary which they pay a large portion of to the clubbie who cleans and maintains their gear and uniforms. My wife and i tried to give the players nutritional meals and even went so far as to pack them lunch for shorter trips. The additional 5 dollars a day is going to be eaten up byu gas tolls and insurance on their vehicles. They are required to get to the park themselves. The players are a commodity to the teams and since hosting have seen the business side of the game. It isnt very pretty for some. I enjoy helping the kids out and will continue to do so, but a living wage would help. PS if you ever do host a player expect to be taking rode trips to see your new “son” play as they advance through the system.
I think a lot of people are missing the point about international players. Those from Latin America in particular are living very cheaply and sending remittances home to their families. In addition to not coming into the game knowing much about nutrition, they don’t have much other than their per diem to live on. Having a better clubhouse spread would go miles in improving their fitness.
I like the concept of this article. My first reaction was, if the Players Union were worthy of their name they would have been advocating for better living conditions for minor leaguers for the past four decades or so. My second reaction was Major League teams don’t have roving nutritionists? Definite opportunity for competitive advantage.
Then, thinking about $25 per day:
Chipotle has some options that we’d agree are relatively healthy and in price range. Noodle company as well.
How much would be enough as a per diem? $40? $50?
It might be cheapest for teams to provide the food and require everyone to eat it together. Each minor league team could maintain a kitchen for the visiting teams. A bit overly big brother, I suppose.
Dave, I love the economics.
However, I might take the idea of efficiency wages and nutrition one step further and apply them to major league talent.
My primary exposure to the theory of efficiency wages regards shirking. Shirking refers to doing less than optimal work; slacking off. Workers who are paid “the market rate” shirk because for them, at least in a saturated market, the job they currently have is substitutable provided transaction costs are low. Thus, you offer a higher wage for two reasons. One, it creates a cost disincentive — you shirk, you’re fired, you lose wage potential. Two, it attracts a stronger pool of talent (and work ethic).
So how can we apply this to players with MLB contracts? What can the league do if Andruw Jones shows up incredibly fat after signing a big contract? Obviously nothing with the union in place, but you kinda wish more teams would place in “wage reduction” clauses to deter poor habits. If Zambrano won’t stop drinking redbull, he loses $$, for example. It’s not unheard of, at least in the counterpositive. There have been contracts with “weight” incentives and the likes in the past. Perhaps one can argue the market has corrected this problem with the death of long term contracts for players not of the highest tier of talent.
Still, it makes you wonder