MLB needs a salary floor

Every team in Major League Baseball should be required to have a player payroll of not less than $120 million.

I’m serious.

Last month, I wrote about why modern discussions of player value have gone somewhat off the rails. That’s because the league’s labor market is largely a monopsony; that is, a single-buyer market, as I explained then.

Yes, there are technically thirty teams, and yes, they technically compete for the same players when those players are free agents, but that doesn’t change that MLB is a monopsony. Why? Because free agency is the only time that players get to decide where they will play, and the only time teams compete over players. Otherwise, MLB - a single buyer in the market for baseball players - assigns players to teams, sets rules that determine how much they will be paid in the minor leagues, sets more rules that determine how much they’ll be paid in the first six years of their MLB careers, and sets rules allowing teams to transfer players largely at will. For all intents and purposes, with very few exceptions, MLB player labor is very much a single-buyer market.

(Note: saying MLB is a monopsony is not saying it’s collusive. Collusion applies in the context of free agency is the sole arguable exception to MLB’s monopsony.)

Collective bargaining is one way to counteract a monopsony, but it’s not sufficient in and of itself. Researchers know that consolidated bargaining power amongst employers drives down wages, but they also know that increasing gaps between productivity and pay also drive down wages. Why? Because if an employer can pay an employee less whilst still retaining the same productivity, the employer is generally going to do so. This isn’t surprising; we see this across the general economy. The Bureau of Labor Statistics noted in 2017 that “[p]roductivity outpaced compensation for the 1987–2015 period in all sectors with significant industry coverage except for the mining sector.”

This productivity gap exists in MLB too. Increasingly, young and cheap players are providing better and better production. As Mike Petriello noted a couple of years ago,

In 2000, players aged 30 and older took 86,019 plate appearances, and they threw 17,373 1/3 innings. They contributed 43.4 percent of all Wins Above Replacement (FanGraphs version). In 2017, players aged 30 and older took 69,110 plate appearances, and they threw 15,241 innings. They contributed 32 percent of all Wins Above Replacement.”

Younger players, of course, get paid less, because they haven’t hit free agency yet.

What happens in an industry with a monopsony and a significant productivity gap? Wages stagnate or decrease, and that’s exactly what we’re seeing now. Earlier this month, we learned that this year’s qualifying offer will decrease for the first time ever, a sign of wage deflation in the market. As Ben Weinrib explained,

After starting at $13.3 million in the 2012-13 offseason, the qualifying offer has grown by approximately $766,000 or 5 percent each year. But it has seriously stagnated starting in 2016-17, when it went from $17.2 million to $17.4 million to $17.9 million to actually dropping. The fact that it would go down is even more upsetting to players since they would expect the QO to rise to $18.3 million just off of inflation.

This isn’t a new trend, as Maury Brown reported for Forbes.

Major League Baseball had another record year for revenues in 2018, but the amount that went to the players saw the biggest drop year-over-year dating back to 2012.

Earlier in the week, I reported that gross revenues for MLB in 2018 were $10.3 billion.

* * *

Last year, the league spent 54.2% of revenues on player compensation, the second-lowest amount dating back to 2010, according to industry sources who wish to remain anonymous. That compensation included not only the big-league salaries that fans have focused on but also players in Minor League Baseball, for which MLB pays. The 54% of total revenues was a drop of nearly 4% from 2017, based on data provided from sources. The last time that the percentage of player salary-to-revenues dropped more than that was in 2012, when the decline was over 6%. In a downward trend over several years, the last time that the percentage of player compensation compared with total revenue rose year-over-year was 2015 (up 4.2%).

So what we have is a monopsonistic labor market, a growing productivity gap, and declining player salaries. How can we fight this? A salary floor.

The idea isn’t new. The NBA has had a salary floor for several years.

The NBA’s salary cap primarily serves as a way to restrict the amount a team can invest in player salaries in a given year. However, because the league has a soft cap rather than a hard cap, there’s technically no specific figure that clubs are prohibited from exceeding once they go over the cap to re-sign players.

There is, however, a specific threshold on the lower end that teams must meet in each NBA season. The league’s minimum salary floor requires a club to spend at least 90% of the salary cap on player salaries. For instance, with the 2018/19 cap set at $101,869,000, the salary floor for this season is $91,682,100.

If a team finishes the regular season below the NBA’s salary floor for that league year, the penalties levied against that team aren’t exactly harsh — the franchise is simply required to make up the shortfall by paying the difference to its players. For example, if a team finished this season with a team salary of $88,682,100, that team would be required to distribute that $3MM shortfall among its players.

Although the NBA floor has been criticized by some, particularly when the tanking Philadelphia 76ers repeatedly came in under the floor, but there’s a certain elegance in its simplicity. The penalty for missing the salary floor is paying your players the difference between the floor and your actual payroll, which basically means all of your players get a raise. Back in 2013, SB Nation’s Mark Deeks explained the logic:

I know not of any instance of a team failing to meet the minimum salary threshold, for the simple reason that there’s no point in missing it. If you’re going to have to pay $52,811,100 in salary anyway, which the ‘punishment’ guarantees, then you might as well get some players out of it. The minimum threshold does not have to be met until the final day of the regular season, and there’s many months of trade talks between now and then.

What’s the impact of the salary floor? In monopsonistic labor markets like professional sports, raising minimum wages increases both salaries and employment rates. A Bureau of Labor Statistics study from 2003 found that a salary floor “unambiguously” improved welfare in a monopsonistic market, and other studies agree.

How about the NBA? Since the salary floor was implemented, player pay has increased dramatically. In 2016, NBA players earned more, on average, than any other professional sport. Nor was this pay concentrated at the high end of the market; NBA players also had the highest median player salaries in the world. Since then, the average NBA salary has increased to $7.7 million for this season. Over the same period, average MLB salaries have actually decreased, from $4.38 million in 2016 to $4.36 million today. Now, one might think that the NBA salary floor would have a deleterious effect on team finances. Nor have increasing salaries caused financial problems for NBA teams, with every team now worth more than $1 billion, and an average team worth of $1.65 billion.

The NBA Salary floor also reflects a guarantee in the NBA CBA that players will receive between 49% and 51% of all pre-expense Basketball Related Income. The salary floor also means that players receive a portion of other revenue streams like signage and television contracts, unlike in MLB where most such which MLB players are still unable to enter. Meanwhile, the players’ share of revenue in MLB continues to fall, with John Charles Bradbury writing a fascinating study on the problem for Kennesaw State University earlier this year.

In short, the salary floor in the NBA has been an unequivocally good thing. So can it be translated to MLB?

Let’s start with how much MLB teams have to work with. That’s difficult because of competing sources and teams’ notoriously opaque financial records, but according to Statista, every MLB team made at least $200 million in revenue in 2018, with Oakland the lowest earner. That figure is also supported here and here. Like the NBA, every MLB team is worth at least a billion dollars. And in terms of operating income per team, the two leagues come in remarkably similarly. The Marlins lost money in MLB; the Cavaliers lost money in the NBA after losing a major talent of their own. Still, the top-end NBA teams tend to make more money than their MLB counterparts, and there are a couple more teams that lose money in MLB than in the NBA.

So with that in mind, I propose a $120 million salary floor in MLB.

It’s not nearly as high as it sounds. The competitive balance tax (luxury tax) salary cap in 2019 was $206 million, making my proposal a minimum payroll of 58%. That’s well below the 90% figure the NBA uses. The average player payroll in 2019 was $137 million. Of the 30 MLB teams, 19 of them - including Cleveland, Seattle, Cincinnati, Colorado, and Texas - exceeded $120 million payrolls in 2019, and three more (Arizona, Detroit, and Toronto) were within $10 million of that mark. In short, two-thirds of the league is already paying this much for player payroll. And frankly, if you're an owner who can’t afford to pay 58% of the luxury tax number, you probably shouldn’t be an owner at all.

So who would this really be targeting? The tanking teams. The teams in 2019 with payrolls under $110 million were the Padres, Royals, Athletics, White Sox, Marlins, Orioles, Pirates, and Rays. All but the A’s and Rays, who played in this year’s wild card game, finished with losing records.

Tanking is becoming a problem in MLB these days. In 2019, there were four hundred-loss teams and NINE 90-loss teams. Attendance declined as teams became unwatchably bad. Concern about tanking became so pronounced that in August, Sports Illustrated suggested that MLB threaten tanking teams with relegation. I wrote for Fangraphs last year that tanking may actually violate MLB’s rules about intentionally losing games. Requiring every team to spend at least $120 million on payroll would disincentive teams from tanking and keep even second-tier teams more competitive.

One other benefit to this proposal is the effect it would have on baseball’s dying middle class. For the last couple of years, baseball watchers have justifiably fretted about mid-tier free agents being frozen out of the game. A salary floor would increase available jobs for those complimentary players - in the 2019-20 free agent market, guys like Kole Calhoun, Didi Gregorius, and Dallas Keuchel.

You might argue that a $120 million salary floor would make rebuilds harder. After all, why should second-division teams spend money if they’re going to lose anyway? But I’d argue that this frames the question incorrectly. This year, four teams lost 100 games. The Blue Jays went 67-95 and finished THIRTEEN GAMES out of last place. The Royals were an atrocious 59-103, and still ended the season ELEVEN GAMES ahead of the unfathomably bad Detroit Tigers. In today’s game, so many teams are tanking that no one is tanking. You can tank as hard as you can, lose a hundred games...and still not be bad enough to land a top-five draft pick. The aforementioned Blue Jays, for example, pick fifth in the 2020 draft. The Pittsburgh Pirates, who lost 93 games finished in last place, don’t make a selection until the seventh pick. So tanking doesn’t guarantee you top-three draft talent so much as it does a lot of empty seats.

Say you’re the 2020 Orioles, and you're not going to win anything unless a meteor falls on four East Coast cities before opening day. You won’t be in on Gerrit Cole; by the time you’re good again, he’ll be in his mid-thirties. But would signing Dallas Keuchel to eat quality innings in an otherwise wretched pitching staff really be bad? Maybe you won’t give up a record number of homers to the Yankees again. Would signing Yasiel Puig to give your fans someone fun and exciting to watch really damage your competitive window? It’s not like Puig would be taking at-bats away from a top prospect; Austin Hays, Anthony Santander, and Puig can co-exist in the same outfield. Maybe a healthy Dellin Betances can save your leads and keep your team’s morale a bit higher. And yes, the Orioles with Puig, Keuchel, and Betances won’t win anything - but they might lose fewer than 100 games. And they might just have a bit fun doing it.

Fun brings fans, and fans bring money; winning isn’t the only way to draw attendance. The 1998 St. Louis Cardinals were a mediocre 83-79, a year after a disastrous 73-89 campaign. That said, they finished fourth among NL teams in attendance, because some guy named Mark McGwire put on a show for fans seemingly every night. The 2005 Padres, a team I guarantee you do not remember today, drew fans to watch Jake Peavy and Brian Giles. At the very least, we know tanking is awful for attendance and competence is, well, not.

It’s also possible a team might decide there isn’t a free agent worth spending the extra money on and just not spend up to the salary floor. Using the NBA’s approach makes sense here as well: pay the difference to the players at the end of the year. Doing so might actually start increasing player salaries again.

There’s one other effect a salary floor would have: discouraging Marlins-style fire sales. I don’t need to run through the history of the organization’s sell-offs, but it’s worth noting that the 2017 Marlins had J.T. Realmuto at catcher; an outfield of Giancarlo Stanton, Christian Yelich, and Marcell Ozuna; and seven regular position players with a 100 wRC+ or better (the exception was Dee Gordon at 97). Imagine if the Marlins had even a $100 million payroll floor to meet that offseason. Instead of a sell-off to clear salary, they would have been required to add almost $40 million; that could have signed Yu Darvish, Zack Cozart, and Mike Minor, and turned the team to a bonafide contender.

So yes: every MLB team should be required to spend enough money to field at least a competent team. It’s good for the sport, good for the players, good for the fans, and good for the owners in the long run. It’s also long overdue.

Sheryl Ring is a litigation attorney and Legal Director at Open Communities, a non-profit legal aid agency in the Chicago suburbs. You can reach her on twitter at @Ring_Sheryl. The opinions expressed here are solely the author’s. This post is intended for informational purposes only and is not intended as legal advice.