Labor Peace in Baseball May Not Last Forever

The following is a guest post by David Berri, a Professor of Economics at Southern Utah University. He is also the lead author of Stumbling on Wins, the general manager of the sports-economics blog Wages of Wins, and is a frequent contributor to the Freakonomics blog.

Last week I looked at the labor negotiations in the NBA. Since then, the NBA appears to have reached an agreement with its workers, ending the latest dispute in professional North American sports.

Over the last three decades, labor disputes have become a common feature in professional sports. In fact – as The Wages of Wins indicated– relative to non-sports industries, labor disputes are about 25 times more likely in professional sports. So the recent lockout in the NBA was hardly surprising.

Photo: ImpactoSports.com

What may be surprising is the recent labor negotiations in Major League Baseball. After labor disputes interrupted the regular season in 1981, 1985, 1994, and 1995 — and threatened to interrupt the 2002 season — we have come to expect difficult collective bargaining negotiations in baseball.  The agreement reached this past week, though, involved no lockout, no strike – and relative to what we have seen regarding the NBA — not much coverage in the sports media.

Although this is clearly good news for baseball fans, there is some reason to suspect that the next agreement in baseball may not be so easy. To understand this note of pessimism, let’s talk briefly about why this agreement came with such little fuss.

Our story begins back in 2002.  At that time, baseball claimed – via the Commissioner’s Blue Ribbon Panel – that:

• baseball had significant disparities in team revenue and team payrolls
• baseball had a competitive balance problem
• only three baseball teams were making a profit

Consequently, Major League Baseball needed to do something or the future of the game would be in jeopardy.

After the deal was reached, commissioner Bud Selig noted that “the issue here was competitive balance and I feel this deal clearly deals with that.” In other words, Selig seemed to think the 2002 agreement solved the problems the Blue Ribbon Panel identified.   When we look at the numbers, though, we see this is not entirely true.

Let’s start with the payroll story. Back in 2002, the New York Yankees led Major League Baseball with a payroll of $125.9 million, while the Tampa Bay Rays had the lowest payroll in baseball, spending only $34.4 million. In 2011, the Yankees spent nearly $203 million on players. Meanwhile, Tampa Bay spent only $41 million. In other words, from 2002 to 2011, the Yankees increased their payroll by 61 percent, while the Rays increased their payroll by just 19 percent. The Rays did manage to spend more than the Kansas City Royals in 2011 (the Royals spent only $36.1 million this past season). But  if the Yankees spending in 2002 was a problem, the Yankees spending in 2011 had to be considered a bigger problem.

What about competitive balance? Stanford economist Roger Noll and the late Gerald Scully developed a measure of balance that compares the actual standard deviation of winning percentage in a league to an idealized standard deviation which would exist if all teams were essentially equal in playing strength. From 2003 to 2011 – or the nine seasons after the 2002 agreement – the average ratio in the American League stood at 1.9, while in the National League the average ratio was 1.7. If we look at 1994 to 2002 – or the nine seasons before the 2002 agreement – these two ratios averaged 1.9 in the AL and 1.7 in the NL. No, competitive balance hasn’t really changed since 2002.

So payroll disparity has worsened and competitive balance hasn’t improved. What about profitability? The answer to that question appears to be the key issue to baseball’s era of labor peace. Although the 2002 agreement did not resolve the issue of payroll disparity and did nothing to change competitive balance, it did increase the amount of revenue sharing in baseball. In fact, Forbes.com reports that $400 million was sent in 2010 from high-revenue teams to low-revenue franchises. Consequently, the Pittsburgh Pirates – a team that has not had a winning season since 1992 – was able to post a positive operating income.

The ability of a chronic loser like the Pirates to earn a profit did not make everyone happy. John Henry – owner of the Red Sox – offered this observation to the Boston Globe in 2009:

“Change is needed and that is reflected by the fact that over a billion dollars has been paid to seven chronically uncompetitive teams, five of whom have had baseball’s highest operating profits,” the Globe quoted Henry as saying. “Who, except these teams, can think this is a good idea?”

Apparently, Henry was not alone in complaining about how baseball’s lower class was spending this money.  As Jason Stark noted at ESPN.com, after the latest agreement goes into effect the revenue-sharing police will now be on the beat.

More specifically, Stark notes…

• If a team is receiving those big revenue-sharing bucks, it will no longer be allowed to spend that money on paying down debt, which has been a popular alibi over the years.
• Teams also now have to report specifically how they spent their revenue-sharing handouts to improve their big league team. No more generalities allowed.
• The union also pressed for, and got, a new rule that directly connects revenue-sharing money to big league payroll. So if you’re getting revenue-sharing checks, the payroll of your 40-man roster now has to be at least 25 percent larger than the amount you’re receiving. In other words, if your revenue-sharing check is for $40 million, your big league payroll needs to be at least $50 million. If it isn’t, (Michael) Weiner (union leader in baseball) said, “you have the burden of proving you’re in c
  ompliance” with the rule requiring that money to be spent on improving the major league team. In the past, that burden fell on the union.

What do all these rules mean?  Teams like the Pirates might have a much harder time turning a profit in the future.  And when that happens, teams like the Pirates may start to demand changes in baseball.  What changes can we expect?

Buster Olney at ESPN.com offered (gated) the following quote from an anonymous club official: “Certainly they didn’t represent everybody’s interest. They just kicked the can down the road and didn’t help competitive balance, which is only going to get worse over the next five years.”

Yes, the story-line five years from now may have already been revealed. Small market teams that are forced to spend more of the revenue sharing money on players are likely to see profits disappear. When that happens, these teams are suddenly going to scream about competitive balance and how baseball needs to do something to control the spending of the big-market teams.  Of course the union will oppose more salary restrictions. And hence a labor dispute will be born.

One must remember, if such a dispute develops it will not be specifically a fight between players and owners. The more important conflict will be between the big and small market teams. In 2002, the small market teams won the battle.  It looks like the 2011 agreement is a victory for the big market teams. In 2016, the game will be on again.  And if the small market teams believe they are losing too much, we may see an end to labor peace in Major League Baseball.