With the collective bargaining agreement up for negotiations, the current document expiring in December 2011, I want to look at the big issues facing Major League Baseball and how they might be resolved. It’s a very good year to sign a new deal, since the health of the sport is very good, with record revenues. The teams and players are both making a lot of money, and the few issues on the table don’t seem to be serious enough to cause a strike or a lockout.

Once cause for concern, however, is the failure of major league salaries to keep up with the increases in revenue in recent years. At the book blog, Tom Tango twice raised this issue, first here:

NHL I think is at 57% (fixed as per CBA), and I think NBA is around 55% (also fixed as per CBA). I don’t know what the NFL is.

So, now, we are supposed to believe that a “free” market (not that it’s actually free) for a small percentage of its union members somehow benefits the MLBPA as a whole? Even though they only get 43% of the revenues?

Second, here. He notes that this is a result of the owners hiring smart people who know how to value players, not collusion:

And you boxed yourself in because the young players, those who don’t quality for arbitration for the first three years, earn a maximum of 2MM$ total, or more likely 1.5MM$ total. Even the NHL pays its young players more, and they have less than half the revenue of MLB. And even players who qualify for arbitration make 50 cents on the free agent dollar, again, a much lower rate than the NHL pays its pre-free agency players. In your quest to protect the veterans, and the hope that their rising tide would lift all the other boats, you are now where you are.

So, be smart, and beg for revenue-splitting, because without a guarantee of a share of the pie, and with pre-free agency severely limiting the bargaining power of players, the players’ share will continue to fall.

There are two points raised by Tom here which I would like to address. The first is that 43% of revenue for salaries is out of line with other sports. The second is his last statement, that players’ share will continue to fall.

First, let’s look at some data. I could only find trust worthy revenue figures back to 2006. Salaries are taken from Maury Brown’s Biz of Baseball salary database. Since that database doesn’t list every player who appeared in the majors in a given year, it may underestimate salaries a bit. MLB revenue came from searching news articles on Google.

Notice that there was just one year in this stretch in which revenue grew much faster than salaries, 2008. Unfortunately for the players, a recession hit in 2009, and the owners once again were smart, not giving away revenue in a year when revenues could easily have declined. It’s actually rather impressive that revenue continued to increase despite the downturn in the economy. Remember, owners have to pay players before they know how much money they’ll receive. I’d say in three of the four years, they did a good job of estimating this, with the players coming out on the short end during the recession and in 2008 due to a large influx of money. The takeaway from the above chart is that there is plenty of money available to give the players a raise.

As for baseball players being underpaid as compared to other sports, I’m not so sure. Hockey may put more money into young players because the nature of the game, (as in football), is that careers are short. The skating and hitting destroys knees, so even good but not great hockey players may not last that long. In other words, their expectation of reaching a free agent pay day is low.

The second drag on baseball contracts is the guarantee. There is a risk signing a player to any long term contract that the player may be injured, and the team pays money for nothing (see Carl Pavano and the New York Yankees). Teams can offset this with insurance, but they still need to pay premiums, which cut into the players salaries.

The third drag is the excellent pension system. It is considered the best among all sports. The teams contributions to the pension and health plans do not show up as salary, but provide the players with a great benefit.

Fourth, compared to basketball and football, baseball incurs high development costs. They don’t have colleges feeding them players for free.

Given all that (and there might be other reasons), I can see the salary component of compensation coming in below other sports, and certainly below 50%.

On to the second point, why I don’t think salaries will continue to fall as a percent of revenue. The current CBA built in a very low increase in the minimum salary during it’s lifetime. The minimum went up to $380,000 in 2007, and rose to $400,000 in 2010, an increase of 5.3%. In the same period, MLB revenue went up 26.3%. In 2011, the players get a cost of living adjustment on the minimum which will take it to $410,000. If the minimum salary were pegged to revenue increases instead, players would be getting about $470,000 this season.

I expect to see a big bump in minimum salaries in the next CBA, and not just the union will be pushing for it. The teams that send money to their poorer competitors are likely tired of seeing that money go into the owners pockets rather than to improving the quality of competition. Since I don’t think the luxury tax will disappear, a big increase in the minimum salary will force teams like Pittsburgh and Florida to spend more of the shared revenue.

The real reason I don’t think player salaries will continue to decline as a percent of revenue is that the teams won’t stay smart. Tom Tango believes what we’ve seen is a real structural change in the game. History, however, is full of examples of people thinking they have markets solved, only to find out they don’t. We probably know more about economics than at any time in history, yet in the last 15 years we saw both a stock market bubble and a housing bubble. There’s no reason to believe there won’t be another free agent bubble that drives up salaries. Just in the last two weeks we saw too moves, the Yankees contract to Rafael Soriano and the Angels trade for Vernon Wells that show front offices can still make irrational moves. All we really need is for a handful of teams to decide that free agents are undervalued, and then start bidding them up. Bubbles seem to be a natural phenomenon. Another one will form in baseball.

Of course, there are ways the union can raise salaries at the lower end by changing arbitration rules, time to free agency, or even built in increases in salary in pre-arbitration years. We’ll discuss those in the next post on the subject.