MLB Players' Salaries as a Share of Revenues: Laying Out the Issues

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The chart above clearly explains what the issue is.  Major League Baseball players' salaries have decreased relative to the league's revenues. The players' shares of the revenues used to hover above 50%, but have since fell to around 40%. As a point of reference, all of the other North American major professional sports leagues have collective bargaining agreements that guarantee players approximately 50% of revenue.

In terms of real dollars, the difference is more striking. MLB revenues were over $8 BB last year.  That means every  percentage point in 2013 represents about $80 MM in salaries. That's close to $100,000 per player.  And that's just for one percentage point of revenues.  If players were receiving the industry standard of 50% (a gain of ten percentage points), that would mean closer to a billion more dollars going towards salaries.

Some people may not think that this is a problem. Players salaries have still been increasing rapidly, even relative to inflation, when most peoples' wages have remained stagnant. Most of the world's workers are not losing much sleep over how athletes may be missing out on a few hundred thousand dollars.

Team shareholders and MLB officials also probably don't see what the problem is.  After all, this is extra cash going into their pockets.  It's a transfer of wealth from millionaires to billionaires, and most fans probably don't care.

But for players and their agents, this is a real problem.  In fact, this might be the biggest challenge the MLB Players Association has faced in a generation.  And while a significant number of players do earn generational wealth playing the game, many fringe major leaguer's never make that kind of money. For them, even a small change in salaries could make a real difference.

But the big question is "Why has the players' share of revenue decreased?" This is too big a question to answer in one post, but I think it is important to lay out the major issues that need to be addressed.  I have organized my thoughts into four major points, that will each be the subject of its own post.  Two are listed as "Player-side issues" meaning that they are most affected by the actions of players (or perhaps agents and the MLBPA as well).  The other two are listed as "Management-side Issues", since they revolve more around the behavior of teams and the league.

Remember, we are trying to explain hundreds of millions of dollars in lower salaries, so it's probably not just one thing. And if it is just one thing, it would have to be a pretty big thing. Before I get into the issues that I will be addressing, I'll mention a few other alternatives.

Some could claim that revenues and salaries are not being measured accurately, or consistently over time. If that were true, this may not be as big of an issue, but there's just no way that the we are off by such a wide margin to explain the relative decrease in salaries.

One other interesting possibility that I didn't list below is if the supply of baseball labor had changed in some significant way. More precisely, if there was less variation in talent, in say, the top 5000 baseball players in the world, then MLB players would have less leverage in negotiating salaries.  Since the quantity of players demanded has been static since the late 1990's, this could be answerable by looking at the data.  Until I see empirical evidence, I'm not giving this scenario serious consideration.

Matt Swartz's latest works on The Hardball Times were not the first pieces to call attention to the players' share of revenue, but they were the most helpful in getting started.  Cot's Baseball Contracts and Biz of Baseball are valuable resources for anyone looking to do research on the topics. Also, Tom Tango's (and his esteemed readers') comments were really what got me thinking about the issue.

So I've already used a bunch of words, and I haven't gotten to the main issues, so here they are. They'll be a post on each one, but for now I've just written enough to clarify what I mean.

Player-side Issues

1. Players are not optimizing their compensation. 

Basically, players and agents are losing many more contract negotiations than they are winning.  The main theory is that early career extensions have been lopsided in favor of teams.  More players are willing to bypass arbitration and prime years of free agency in favor of relatively less rich extensions. Some would argue that this phenomenon can even affect players who haven't received extensions. Jeff Passan of Yahoo Sports thinks this issue is very important, and wonders if less players are looking out for the "next guy". These extensions are certainly a far cry from players' fights against the reserve clause and collusion.

2. Salary is a relatively less important piece of player's compensation packages.

Another possibility is that players as a whole are placing less of a value on salary when signing contracts.  In this scenario, a relative decrease in salary isn't necessarily a problem for the MLBPA.  Players, like workers as a whole, may be increasingly factoring in location, career development, or "fit", when considering offers. In baseball terms, this could involve working with particular coaches,  being a part of a certain team chemistry, or even "playing for a winner". While this likely wouldn't explain a huge change in salaries, it could be a part of the trend.  We may also be missing out on the value of small items such as health care and the players' pension plan.


Management-side Issues

3. Teams have become more efficient in the way they compensate players.

A generation ago, teams were only effectively able to limit pay via collusion.  Today, there is a common framework that executives can use to put a value on every player.  Every team is at least aware of the market $/WAR.  Additionally, newly available statistics and more modern thinking may have led to cheaper, younger players occupying more roster spots relative to older, more expensive players. Regardless, the increase of business-minded management teams have led to more sophisticated roster construction.

4. The revenues of teams are now less dependent on team performance (and how much they spend on players).

Of all the issues, this has the most potential to impact salaries.  It would also be the most difficult problem for the players to address.  As gate revenue, and other revenue related to team success (merchandise, concessions, parking, etc.) have decreased as a share of total revenue, teams have less incentives to spend big on winning teams.  With most teams locked in on long-term local TV deals, short-term winning is also somewhat less important. National TV money, and other centrally distributed revenue (revenue sharing funds, MLBAM earnings), is earned regardless of team performance. Finally, the competitive balance tax acts as a disincentive for teams with the highest marginal revenue products from spending freely on players.

Additionally, across all sports, the business operations of teams have become more professionalized. Every team business official I've talked to has described the importance of separating financial success from on-field success.  With revenue targets that must be met regardless of winning or losing, perhaps a larger share of MLB's revenues should be going to the front office folks who are finding better ways to capture every last dollar (at least in the short term).

So those are what I consider to be the main factors.  I think that my individual posts will be more content-filled and incisive, but I needed this post to lay out the issues.  Hopefully it helped line things up for you as well, and let me know if I missed anything.