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.

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Matt writes for FanGraphs and The Hardball Times, and models arbitration salaries for MLB Trade Rumors. Follow him on Twitter @Matt_Swa.

25 Responses to “More Than They Collectively Bargained For”

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  1. Anon21 says:

    Yeah, between that remark and the Canada incident, one’s left with the overwhelming impression that Van Slyke is a moron. Good thing his free market in baseball talent didn’t demand intelligence.

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  2. Ronin says:

    I totally agree that the new CBA will have a next to zero impact on talent entering the game. In addition to the fine points you mentioned above I would say that the number of multi-sport stars is vastly overrated. Most high school kids that pursue baseball whether professionally or collegiately are baseball first athletes. I doubt very much that any athlete has ever said “well I like baseball better but the draft bonuses are better in the NBA so I guess I will go play college basketball instead of signing with the Mets”

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    • Ronin says:

      Or that a latin player will say decide not to sign and play soccer or join the Asian leagues instead of signing with a MLB organization.

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      • Colin says:

        Latin players from where? The Dominican? Other Caribbean countries? Venezuela?

        No that is really not an option for them. Soccer development is next to 0 in those areas. Unless by Latin players you mean the odd Brazilian or Argentine player in the MLB then I suppose you are right.

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    • Nitram Odarp says:

      It goes even further than that. While NBA players may get more on average, there are only 30 guaranteed contracts each year for NBA draft picks. The guys who are good bets to be first round picks (the ones who might pass up on MLB money) are already going to play basketball.

      In terms of football, you have to wait at least 3 years, while risking serious injury, and outside the top of the first round, the guaranteed money offered to draft picks isn’t much, if at all, better than what’s offered by MLB teams. Unless you’re a high end pro-style QB prospect (Zach Lee maybe), I don’t actually believe any of these kids are really going to choose college football over money right away. They’re really just using football as leverage to get more out of the MLB team that drafted them.

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  3. Paul says:

    But you’re injecting a factual argument into a emotional one.

    Thanks to frank-speaking guys like Orlando Hudson, isn’t it really clear at this point that the lack of athletic, i.e. African American, players in MLB is cultural?

    If a young player cannot see from the recent example of a guy like Tim Beckham, who quit baseball in HS and played sports that were more in line with his athletic talents, then went back to baseball when his brother convinced him that he could make a zillion dollars before ever playing a pro game, he was the first overall pick.

    Or Mike Stanton? Why don’t we ever talk about the guys who DID choose baseball for exactly the reasons this article makes clear, and become superheros?

    The fact is that baseball is not conducive to exceptional athletic ability all over the diamond. The problem I see is that those who lament the lack of African American players in baseball are feeding a stereotype, and it just reeks of nostalgia, not practicality.

    Why are we not talking about the lack of 240 lb African American first basemen? Many of the great athletes that people would love to see on a baseball diamond are just not very good at baseball. There is a long list of them that wash out in AA because they just can’t hit, and it turns out that is kinda important.

    Then again, perhaps it’s the stereotype of only targeting the athletic black player that is the problem. There is more competition for those players in the other more athletic sports. Mike Stanton was a second round pick who a lot of people thought would have to move to 1B when he was drafted. Tim Beckham was the first overall pick the year before. Why scouts are not scouring the country for massive tight ends who might catch 20 balls in four years of college ball, to try and replicate a Stanton, seems odd doesn’t it?

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  4. Richie says:

    Ah, a voice of sanity. Then again, let’s see how many hits this gets.

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  5. Math says:

    How can the median difference in standings be 2.25? Do you mean the average?

    Sorry to be that guy.

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  6. Richard says:

    “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.”

    Nothing in your description is anathema to capitalism, which rarely, if ever, has much to do with a “free market”, whatever that might be.

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    • B N says:

      I Thought Capitalism Looked Like This For The Longest Time.

      But then I realized that was capitalization.

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    • Matt Swartz says:

      If you click through and see the whole comment, he clearly wasn’t talking about that. And capitalism itself would be defined by private ownership of capital, and with public financing of stadiums and restrictions in who can buy or sell the 30 assets, lack of free entry of new teams into the market…it’s just not true either way.

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      • Richard says:

        I had not, it’s true, clicked through to read the whole comment, though I have just now. So he’s talking about some nonsense fantasy about competition rather than free markets per se. Not much difference, rhetorically speaking. I also see your comment in that thread, which is about the same as what you say here. I’m saying that baseball is about as capitalist as it gets. Capitalism is about the endless accumulation of capital, however that happens. It’s definitely about, always has been, about socializing costs and privatizing profit. Public financing of stadiums is standard operating procedure. And it always tends towards monopoly. The last thing capitalists want is competition. Though I know full well that we have been ideologically conditioned to believe just the opposite.

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      • delv says:

        “Capitalism is about the endless accumulation of capital, however that happens.” This is pretty wrong…

        By your loosey goosey definition of capitalism, feudalism counts as capitalism too. And stealing, for that matter. And state communism.

        Capitalism is best defined as either 1) a system characterized by a lot of “private ownership of capital” (whatever “private” means), as Swartz said, or 2) a system in which individuals sell their labor power (as opposed to selling themselves, like an indentured servant might) to a buyer and the buyer uses the surplus labor power to gain wealth for him/herself.

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  7. I am confused when you say “lower the amount that teams need to spend to acquire this monopsony power over a player.” There can only be monopsony there is only one buyer for a player’s services. The team gains monopsony power when they draft a player, not when they sign him, and that is only if he is a college players, since high schoolers have colleges as additional buyers. Once a contract is signed, there is no market for the player’s services because they are no longer for sale.

    Its is not the cost of monopsony power that is decreasing, but rather the an increase in the marginal cost of signing a player for above-slot value. The team’s monopsony power remains unchanged, except maybe in the case of international players who will be subject to a draft instead of free agency.

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    • Matt Swartz says:

      Technically, we’re both right. As the marginal cost of the bonus increases, it functions as a tax, lowering the amount that will be spent. So the team has a lower cost as a result of the bargaining that will now take place.

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  8. Jacob Smith says:

    The NFL has no age restriction on the draft. They do require a player be 3 years removed from high school, but there is no actual age limit. Amobi Okoye went to college at 16, and was drafted at 19 after playing 4 years of college football. He would have been eligible to go pro after his junior season, but chose to return to school instead.

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  9. Bill says:

    I would think that potential earnings need to be considered here as well. A bad major league baseball player has a longer major league career than all but the best running backs. If I were a 20 year old athlete with an option between being first round pick in the MLB or the NFL, I would choose MLB every time. Do I want a 15 year career or a five year career?

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  10. Mr Punch says:

    I doubt that the economic considerations presented here have much to do with the supposed dearth of African-American ballplayers – the key decisions tend to be made at the amateur level. (I say “supposed” because the relevant stat is not the percentage of African-Americans, but the ratio to white Americans.) And note that in the absence of a significant signing bonus, a high school grad gets roughly equal value from an athletic scholarship and several years in the minor leagues.

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    • Jay29 says:

      But the athletic scholarship is money that is required to go towards their education. Give an 18-year-old athlete the equivalent amount in disposable income and, on average, hardly any will be spend on education.

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  11. Jonathan says:

    Objectively speaking, adding a second wild card does not increase the marginal value of a win. Wild Card #2 (WC2) is only worth one-half of one playoff spot, relative to what a playoff spot was worth last year.

    Winning the division means more–IFF you are in the division with WC1. This is because you are now penalized for 2nd place. If you’re in the division with WC2, then the marginal benefit of going from 2nd to 1st means proportionately less (unless both wild cards are in the same division). If you’re in a division without one of the wild cards, then winning the division means the same as it did last season.

    The new format won’t make the division title matter more. It will make more division titles matter.

    I think you are correct about salaries increasing, but not for the reasons you mention. Hope is a very powerful thing, and even if it is just in contention for a wild card spot, fans will tune in to watch. It isn’t as important how much of a chance a team has of winning the World Series–fans will be riveted as long as the team is in contention at all. So this will encourage owners to spend, as the bar is a bit lower. It will also increase late-season viewership for a few cities.

    From a competitive standpoint, it’s not catastrophic. All that’s going to happen is that some Wild Card teams are going to be bumped by somewhat-inferior teams. And that can’t happen if the gap from WC1 to WC2 is 0-1 games. I just wish they re-worked the seeding instead. Just seed it 1-5. I prefer to live in an NBA world where divisions mean squat.

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    • Matt Swartz says:

      Click through to the links above for more detail, but in short, there are a few reasons why the marginal value of a win goes up.

      One is that one more playoff game for a team winning the wild card is that much more added revenue for being good.

      But the main one is that teams don’t pay for a win directly. They pay for an EXPECTED win. What that means is that they pay to increase the probability that they make the playoffs (in addition to paying for the added regular season revenue of being 1 win better in talent level). The probability of making the playoffs goes up if you are a better team. The closer the race, the more likely that one game will make a difference. Since the spot on the fence is closer to .500 now, the odds of 1 win making the difference have gone up. Another way of looking at it is that since 1996, the 31% of the time a wild card race was decided by one game. However, 41% of the time, the 2nd and 3rd place teams in the wild card were one game apart.

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