Baseball’s New Labor Wars That Needn’t Be

Today’s guest columnist is Andrew Zimbalist, professor of economics at Smith College and author of several books on the economics of baseball. He has consulted in the past both for the MLB Players Association and the commissioner’s office.

MLB has entered its first work stoppage since 1995. It is not surprising to see the union and the commissioner’s office each declaring the other side to be unwilling to engage in serious bargaining. Nor is it surprising to see media coverage raise the temperature with yet more incendiary rhetoric, such as: “The first day of MLB’s work stoppage produced hostility, resentment, anxiety, and apprehension” with predictions for a lengthy work stoppage.

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Rather than picking villains, it makes sense to step back and take a 30,000-foot view of what is going on. The standard line is that labor disputes in sports are simply a battle between billionaire owners and millionaire players and why don’t they grow up and stop bickering. On one level, that’s a reasonable perspective, but on another, nobody likes to lose money, and everyone likes to be treated fairly.

Even though the average salary in MLB is over $4 million, players are rightfully concerned that league revenues and franchise values have been growing more rapidly than their salaries; that free agency rules prevent most players from reaching market value salary levels until their late 20s or early 30s; and that more onerous competitive balance tax rules have driven down compensation. And owners are rightfully concerned that the pandemic took a significant financial toll on the league; that baseball players get a larger share of leaguewide revenue than in other sports leagues; that future TV/streaming revenues are uncertain; and that cultural patterns among younger demographics threaten the game’s popularity.

Let’s drill down a bit. Each of the last three collective bargaining agreements (CBAs) has seen (1) the luxury tax level increase slower than league revenues and (2) higher tax rates when team payrolls exceed the cutoff level. Among other factors, these changes have led the major league player salary share in MLB revenue to decrease from 51.6% during 2007-11, to 50.2% during 2012-16, and to 49.3% during 2017-21. It is perfectly understandable that the Players Association wants to arrest or reverse this decline.

Note the following, however. Although the accounting rules for defining revenue differ sport by sport, MLB’s salary share remains higher than the salary share in the NFL, NHL or MLS. Also note that MLB owners spend around $20 million per team on minor league player salaries and signing bonuses, amounting to 7.1% of the total player compensation on average during 2017-21. The other leagues spend between 0% and 2% on their player development system compensation. When minor league compensation is included, the total player compensation during 2017-21 was 56.4%, very little changed from the 56.9% during 2007-11, and it puts baseball still further ahead of the total compensation paid to players in the other leagues.

Given these facts, it is evident that while both sides have cause for concern, MLB’s overall compensation system has produced comparatively stable results, and baseball players, despite recent slippage, are still in a preferential standing in the professional sports world.

If to this picture we add the current offseason’s free agent contract signings and extensions, valued thus far at $2.22 billion compared to $1.68 billion last offseason, there appears to be more evidence that the system is not broken. Indeed, Fangraphs projects that when the current offseason concludes, the total value of new signings and extensions will be at $3.63 billion, which would shatter the previous record of $2.65 billion set prior to the 2017 season. Further, these numbers suggest that the player share for 2022 is on track to well surpass that of recent years.

All this supports the view that the current system does not need an overhaul. It needs tweaking. There are some significant concessions that can be made that respond to each side’s concerns. Without considering the entire litany of issues in the CBA, below I offer examples of compromises that could make the system both fairer and more efficient.

The Players Association has called for MLB to reduce the amount of revenue sharing from rich to poor teams from around $450 million to $350 million. The reason for this position is that the sharing system is based on team revenues. When a team wins more games, it generates more revenue and has to pay more into (or receive less from) the sharing system. This constitutes a tax on success and blunts the team’s incentive to invest in players.

For example, if a team has to pay 35% of extra revenue into the sharing system, then a player with an expected incremental revenue production of $20 million gross will only generate $13 million net to the team. If the team followed principles of economic efficiency, it would lower its maximum salary offer by $7 million. (A more cynical view is that the union called for lower taxes on rich teams to divide MLB’s ownership.)

The problem is that the sharing system is needed to balance the teams’ competitive strengths as well as stabilize the finances of smaller market teams. There’s a reasonable solution. Keep the current level of sharing, but base it on the value of a team’s market rather than on team success. There are a number of ways to do this, but it gets wonky.

The Players Association also believes that MLB revenues are poised to increase with the legalization of sports betting in a growing number of states. The owners acknowledge this, but they believe there are offsetting factors. A reasonable solution would be to introduce a mechanism to have the players benefit from an uncertain bonanza of gambling (or other) revenues. Since the MLBPA wants to move arbitration eligibility from three years (actually, 17% of players with the most service time between two and three years earn eligibility, known as Super 2s) to two years, why not have an algorithm that stipulates if MLB revenues grow by more than, say, 5% the previous year, then 25% of Super 2s become arbitration eligible, and if the growth is above 7.5%, then 35% become eligible, and so on. A symmetrical provision could be added for revenue decreases.

Another tweak: The owners have offered to introduce the DH into the National League and continue an accord reached in 2019 to expand the active roster from 25 to 26 players. Historically, there are an additional 15 players on the so-called 40-Man Roster (25 active roster plus 15 extra spots), but the extra spots declined to 14 when the active roster was expanded. All players on the 40-Man Roster are in the union and work under contracts controlled by the CBA. Why not offer to expand the roster of 40 to 41, to adjust for the expanded active roster? The union would expand by 30 players.

At the end of the day, whether the sides drag out their discussions for two weeks or two months or longer, the final tally will likely alter the players’ share in revenue by less than one percentage point. Everyone will be better off if the owners and players take the long view—now, rather than later.

Of course, if the players want to guarantee a certain salary share above all else, there’s a straightforward path. It’s called a salary cap. Alas, that term seems to be politically incorrect.