Download The Economics of Baseball

Player salaries, MRPL, and
exploitation
(revised 13 Nov. 2008)
News flash:
MLB players are highly paid
• Average MLB salary = $3.2 M (April 2008)
– More than 2 times as high as in 1998
– More than 10 times as high as in 1983
– Less than NBA ($5.4 M in 2007)
– More than NHL (~$2 M in 2007) and NFL ($1.4 M in
2006)
• Median MLB salary = $1 M in 2006, 2007, and 2008
– Highest ever; previous peak was $975,000 in 2000
– 85 players made $10 M or more in 2008
• Up from 66 in 2007
marginal revenue product of labor
(MRPL)
• = the amount of revenue that an employee
generates for his employer
• standard economic answer to “How much is
that employee worth?”
• can be measured in yearly terms (salary), or in
hourly terms (hourly wage)
• marginal product of labor (MPL) = how much
OUTPUT an employee produces
MRP theory & player pay
• First, note that athletes are not the only very highlypaid people in U.S. society
• Also, free-agent contracts are examples of
VOLUNTARY EXCHANGE (market transactions
agreed upon by buyer and seller)
– Nobody forces the owners to pay such high salaries.
• Rodney Fort: “talent is hired to produce [wins] in
the long run.”
– perhaps more than just wins...
– Mark McGwire, 1998: extra MRPL of $15M?
A labor market under perfect competition:
Assumptions
• Many buyers, many sellers
– > nobody has market power
• No restrictions on pay or employment
• No cartels among employers or workers
• Diminishing returns
--> downward-sloping demand curve for labor
• Upward-sloping supply curve for labor
Notation (for diagram drawn on board):
•
•
•
•
•
L = # of workers ( = QL = quantity of labor)
w = wage ( = PL = price of labor)
SL = supply of labor
DL = demand for labor
MRPL = marginal revenue product of labor
– MRPL = the amount of revenue that an
additional worker generates for the firm
Economic exploitation
• MONOPSONY: a labor market with just one buyer
• ECONOMIC EXPLOITATION
• = difference between a worker’s marginal
revenue product and his wage
• = MRPL - w
• In a monopsonistic labor market:
• w < MRPL
• w < w* (competitive wage)
When the baseball players’
labor market was a monopsony
• Until 1976, when all players were under the
reserve clause.
• RESERVE CLAUSE: a provision in baseball’s
rules that allowed owners to renew a player’s
contract automatically for one year.
– Players either re-signed with their teams after each
season or retired (or were traded or released).
– No free agency; no competitive bidding for players.
– Held salaries down; average salary = $25,000 in 1969.
Independence Day
• July 1976: new Basic Agreement gives all
players free agency after 6 years of service.
– Salaries surged after 1976; up 42% in
1976-77
– Can use monopsony diagram to illustrate
• [See link on course website, “MLB’s Labor Economic History, 1945 Present,” for details on the Messersmith-McNally case that ended the
reserve clause and brought free agency to MLB.]
Baseball’s current system
Years of ML
Eligible for…
service
0–2
Rookie minimum (Team can pay more if
($400,000 in 2009) it wants.)
3–5
Salary arbitration
6 or more
Free agency
(A handful of “Super
Twos” also can go to
arbitration.)
Baseball’s salary explosion,
1976-present
• “Freedom and prosperity”
• Shift from monopsony to competitive bidding was
less sudden than it seems
– Over time, more and more teams played the FA market
– Collusion against FA’s held salaries down in mid-1980s
• Salary arbitration (1973-) allowed 3rd-to-6th-year
players to piggyback on FA salary scale
• MLB revenues surged -- attendance rose, TV
revenues soared, stadium revenues soared, ...
Comparison of performance
(MRPL) and salaries
• First, how to measure MRPL for baseball
players? The standard, simplified way is a
two-step process:
– (1) Using player statistics, estimate each
player’s contribution to team wins;
– (2) Estimate the contribution of more wins to
team revenues.
For hitters, the one statistic that has
the highest correlation with team
winning percentages is...
“OPS”
• =
On-base percentage (OBP)
+ Slugging percentage (SLG)
• OPS * (player’s plate appearances as % of team’s)
= what Zimbalist and Bradbury use to measure
hitters’ productivity, in computing MRPL’s
For pitchers
• Earned run average (ERA) is the standard
measure
– Bradbury prefers “Defense-Independent
Pitching Statistics” (DIPS), which is like ERA
minus the contributions of the team’s fielders
• Includes walks, strikeouts, and home runs allowed
– Then compare a pitcher’s DIPS with the league
average, and multiply by his innings pitched as
a % of his team’s total.
Next steps toward estimating MRPL
• Estimate the player’s contribution to
team winning percentage, based on
wins as a function of OPS or
ERA/DIPS
• Estimate contribution of additional
wins to team revenues
Comparison of performance (MRPL)
and salaries:
• Exploitation = MRPL – salary
• Zimbalist (1992):
– Younger players tend to be exploited (pay<MRPL)
– Veteran players (6+ years in majors) tend to be “overpaid” (pay>MRPL)
• MRPL calculations by Bill Felber (The Book on the
Book, 2005) echo Zimbalist’s conclusion.
• MRPL calculations by Bradbury (p. 195) find
pay<MRPL (i.e., “exploitation”) but a much smaller
gap for veterans.
– But Bradbury doesn’t “think this is exploitive” if you take development
costs into account.
MRPL - salary, by service category
Salary as percentage of MRPL
(2005,
Bradbury;
(1986-89,
hitters,
Zimbalist)
pitchers)
Years of
service
Category
0–2
reserved
16 – 25%
(highly exploited)
11%, 10%
3–5
arbitrationeligible
50 – 64%
(exploited)
23%, 22%
6 or
more
free-agenteligible
140%
(overpaid)
92%, 64%
How do we explain those systematically
“overpaid”* veterans?
•
(* overpaid by Zimbalist’s and Felber’s estimates, not Bradbury’s)
•
Nature of the (seniority) system
– Most free agents are past their prime (age 30+), which reduces their MRPL, but as
free agents they’re in a position to earn the most money
– Limited supply of free agent players
– Many free-agent contracts are long term (less risky for player)
• --> Reduced incentive to work hard?
•
Statistical MRPL measure (based on stats and wins) may be too narrow
– Doesn’t count leadership, experience, consistency, marquee value
– Also doesn’t count expected value of playoff or World Series success, or of extra
offseason ticket sales due to a free-agent signing.
•
Back to supply and demand
– Limited supply of free agents, high demand for players who can help a team
– Concept of value above replacement – A player’s value is not just relative to the rest
of the league, but also to his team’s next best option.
• Ex.: A team that has no MLB-caliber catcher in its organization may be rational
to “overpay” for a catcher.
Salary arbitration
• A mechanism for players with 3 to 5 years of service to avoid being
underpaid relative to their peers
• Established in 1973, implemented in 1974
• How it works:
– If a player and his team cannot agree on his salary for the next
season, then, separately:
• The player submits a salary figure
• The team submits a salary figure
• An arbitrator decides which figure is more reasonable and awards it.
– “Final offer” arbitration: The arbitrator must pick one figure or
the other, cannot split the difference.
– The player and team, however, can always settle on a
compromise figure before the arbitration hearing.
– The vast majority of arbitration-eligible players reach an
agreement with their team before filing for arbitration or going to
arbitration.
» Salary arbitration is an acrimonious, risky process that
players and teams generally seek to avoid.
Effects of salary arbitration system
• Higher salaries (for players with 3-5 years of MLB
service)
– “I was going to be rich or richer”
– Salary arbitration and free agency a potent combination
– Ironically, this is true even though owners have won the
majority of salary arbitration cases.
• More multi-year contracts for young players
– Multi-year contracts are a way to avoid arbitration and
yearly salary spiral.