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.

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 compliance” 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.

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COMMENTS: 12


  1. Mike B says:

    It seems that the solution is just to play Baseball in big markets.

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  2. Thomas says:

    Tying revenue sharing to big league payroll is a way of saying that revenue sharing can’t be used for talent development. It’s of a piece with changes to draftee compensation. Apparently the big market teams are worried about something, because they’ve essentially outlawed the plan that the Rays have followed over the last few years.

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  3. Jason Guerrero says:

    The CBA also made a number of changes to the draft. Each club will be assigned an aggregate Signing Bonus Pool prior to each draft based on signing bonus “slots” given to each of their picks. If they exceed their Signing Bonus Pool, they get hit with a new luxury tax:

    0-5% – 75% tax on overage
    5-10% – 75% tax on overage and loss of 1st round pick
    10-15% -100% tax on overage and loss of 1st and 2nd round picks
    15%+ – 100% tax on overage and loss of 1st round picks in next two drafts

    The changes pose an interesting situation to me: What is the best strategy to use? Obviously it’s going to depend on the available players, and what other teams do–but overall, are there any potential strategies that freakonomics/economist thinking could yield? For example:

    Taking college senior non-studs (who would have little leverage and be willing to sign for well below slot) with picks #2-10 and putting all your eggs in one basket for a signability guy at #1?

    Continuing to pay overslot and simply forefeiting future #1′s. Seems like a steep price to pay at first, but in those future, non-1st-round-pick-having drafts, would enough 1st round talent slip for signability reasons that if we simply continued to pay overslot we would end up with more talent anyway? Basically saying: “Take our #1 pick–by paying overslot, we’re getting the equivalent of 3 or 4 #1 picks later in the draft anyways.”

    [WORDPRESS HASHCASH] The poster sent us ’0 which is not a hashcash value.

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  4. Mike says:

    I like that the Rays are used as the example. As I recall, their tiny payroll got them just as far in the playoffs as the Yankees. Competitive balance? Maybe not, but competitiveness doesn’t directly correlate to spending. Maybe the Yankees are just angry because other teams have figured that out and they haven’t?

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    • Adam says:

      They had a low payroll because they built their club through the draft. With the new draft restrictions, this so-called competitive balance is gone. It’s only going to get worse for the small market clubs who can’t compete with the Yankees/Cubs/Red Sox on the big free agents.

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  5. Mike says:

    Or have promotion/relegation like European Soccer.

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  6. Steve says:

    Since ’95 only 1 WS winner has been in the bottom half of payroll. The ’03 Marlins. Somthing is wrong with this system.

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    • Nil says:

      You need to look at average payroll over a much longer timespan. The same franchise will drop into the bottom half of the payroll ranks while they are trying to rebuild with young players, and then assuming the rebuilding works and they believe they have the talent to compete they will then increase payroll to hold onto the players they develop and attempt to sign a high priced free agent or two maximize their chances.

      A good example would be the Chicago White Sox who won the WS in 2005. They were in the bottom half of payrolls from 1998-2003. Another example is the Angels who were in the bottom half of payrolls in 2000 and 2001 and upped their spending to the top half during their WS run in 2002. Then there was Arizona which was near the bottom of the payroll scale in 1998 as a new expansion team, then splashed out big free agent deals for Randy Johnson and later Curt Schilling which took them to a WS title in 2001. Finally the Marlins WS victory in 1997 marked the year they spent seriously after being in the bottom half of payrolls the four year prior. So there is at least four teams since ’95 that while they weren’t in the bottom half the particular year they won the WS were in the bottom half for several years while developing much of the talent that led to their WS title.

      The Yankees and Red Sox have the luxury of avoiding such cycles of boom and bust, and a few badly run teams like the Pirates never get out of the cheap rebuilding phase. For the average MLB team however this sort of success cycle is to be expected.

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  7. robin marlowe says:

    Perhaps not in baseball, but it’s inevitable, at least, in my line of work.

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  8. Doug M says:

    San Francisco Giants contributes to the revenue sharing pool about the same ammount of money that the Oakland A’s draw. Why? Because they have better marketing?
    The Giants have a better park. They built that park with their own cash. Why make that kind of investment in a world of revenue sharing?

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  9. mfw13 says:

    I think it’s a fallacy to use payroll to measure competitive balance, since no causal relationship has been established between payroll size and winning the World Series.

    After all the Yankees have won only one World Series over the past ten years, the same number as the Florida Marlins, who are usually near the bottom in payroll, and other big market teams such as the Cubs & Dodgers have had no success whatsoever.

    There may be a causal relationship between payroll size and REGULAR SEASON success, but certainly not between payroll size and postseason success.

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    • Joshua Northey says:

      You realize that you are just completely wrong. Payroll correlates with wins quite strongly and wins correlate with world series wins quite strongly.

      You need regular season success to even have a chance at post season success. Post season success is mostly random because the sample is so small.

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