Stage 3: Collective Bargaining. Stage 4: Collective Depression
Before kicking off this post— which has been delayed for a while— it’s important to recognize an key event from this past week that set into motion the collective bargaining mechanism that I’ll discuss today. Marvin Miller— noted MLB Player’s Association director— was inducted into the Hall of Fame this past week. In the late 1960s and early 1970s, Marvin Miller drove the expansion of organized labor in baseball to make the MLBPA one of the most powerful unions in the country. It was under Miller’s leadership that MLBPA became the body that it is today and established the precedence for collective bargaining in baseball.
But Miller owes part of his success to a man who remains to be enshrined in Cooperstown: Curt Flood. Flood, in refusing to accept a trade from the Cardinals to the Phillies in 1969 became the face of a labor revolution in baseball. Previously, MLB had operated under the reserve clause, where players were bound to the team that initially signed them in perpetuity and would be subject to whatever the team decided for them. While Flood was essentially martyrized when the Supreme Court ruled in favor of the reserve clause and MLB’s antitrust exemption, his legacy became a defining force in ending the reserve clause in 1975.
Today, in the wake of Miller’s induction to Cooperstown, Tony Clark— current MLBPA director— faces one of the most serious collective bargaining negotiations since 1994 when a a work stoppage shut down nearly a season of baseball. In context of the Covid-shortened 2020 season as well, a potential work stoppage in 2022 could spell disastrous to a sport that faces waning engagement.
With three months to go until the existing CBA expires, information has begun to leak from either side on the proposals for collective bargaining and they illustrate each side’s concerns, compromises, and vision for the game. In particular, two main adjustments to the system have become evident in recent weeks. First, a proposed salary cap and floor in baseball that would seek to drive parity and increase competitiveness. Second, a reimagining of arbitration, free agency, and service time that would change the landscape of roster construction and labor relations.
Diving into the first of these proposals, part of MLB’s renewed labor proposal is lowering the competitive balance tax threshold from $210M to $180M. In exchange for this lowered threshold, MLB also plans to institute a salary floor at $100M. Essentially, this would force some level of parity across teams, normalizing payrolls between the two points. Currently, Luxury Tax payroll between teams varies between $62M for the Cleveland Baseball Team and $253M for the Los Angeles Dodgers. 7 teams fall below the $100M threshold currently, but MLB has not specified any particular penalty for failing to meet a salary floor. The NBA— which currently has a salary floor itself— only requires that teams distribute any difference between their payroll and the floor to its personnel per an allocation determined by the NBA Players Association. In this way, the NBA’s floor doesn’t serve as a strict incentive against anti-competitiveness but only a mere slap on the list.
If enforced properly with a focus on deterring anticompetitive practices, creating a salary floor would increase parity since it would create a forcing function for lower payroll teams to take on high-dollar contracts. However, it would also create incentives for low-payroll teams to take on contracts for aging veterans in exchange for future value. Hypothetically, if the Cleveland Baseball Team remains $34M below the salary floor, they could take on $34M in contracts from the Dodgers in exchange for some significant prospects. This would help both teams avoid penalties for being outside the bounds of defined salary and it likely would net Cleveland a return in the form of high-value prospects. This type of salary-offsetting trade would become commonplace in MLB if high and low limits are placed on payrolls.
Conversely, this restriction on payroll may handcuff teams from making improvements along the margins. By lowering the top limit on payroll nearly $40M, teams would be limited in making in season additions and improving their rosters. MLB would likely keep the salary cap as a soft-cap, enabling teams to theoretically exceed this limit in exchange for increasing taxes on dollar over the $180M cap. MLB could also implement rules similar to the NBA’s salary cap here, allowing teams to resign select free agents without affecting payroll tax calculations. If regulated like the NBA, this may encourage MLB superstars to sign short-term contracts on the free-agent market since teams would be limited in terms of financial overhead for the initial signing. After the season, the player may be able to leverage an option or renegotiate a contract with the team for higher dollar value and a long-term guarantee— thereby counting as a “resigning,” and enabling financial flexibility. Another option for MLB is potentially allow pro-rated or limited impact for midseason additions. Thereby, teams may be encouraged to make more moves around the trade deadline as acquired players may not count against the financial limitations.
Ultimately, this policy could upheave the financial framework of baseball’s labor market. Superstars are positioned to lose for sure. With less financial space, teams are less likely to offer $30-$40M contracts that chew up as much as 25% of allowed payroll for 1 man on a 40 man roster. By contrast, young, fringe, and replacement-level players are likely to benefit. In small market teams that are eager to meet a minimum payroll and would rather invest in talent than simply pay a penalty, these players are likely to find a larger market.
This brings us to the second major leak in CBA negotiations: the restructuring of service-time. And bear with me while I review the mechanics of the current service time structure. Today, players are determined free agents after the season in which they accrue their sixth year of service time. Players accrue service time for each day spent on an active MLB roster (26 man, not 40 man) and one year of service time equals 172 days spent on an active roster (where a typical season is roughly 187 days). This delta enables teams to engage in service time manipulation: where a player is kept in the minor leagues until the maximum number of days of service they can accrue in their first year is 171. If done, a player’s first year— though 92% of a full season— would not count toward the 6 years of total service that determine free agency, essentially buying the team a bonus 7th year of control.
To remedy this, MLB and MLBPA seem to be discussing tying free agency to age rather than service. Players would automatically be declared free agents after reaching 29.5 years of age, regardless of if they have 1 or 10 years of service. Obviously this is a double-edged sword. Winners here are late-bloomers: Aaron Judge for example, who would hit free agency two years earlier than expected. The obvious losers are the growing crop of young superstars: Fernando Tatis or Juan Soto, who made their debut as teenagers and may be subject to three to four more years of team control.
Ultimately, while this solution to service time may decrease manipulation by teams since it removes the incentive to keep a player in the minors, the effect of player earnings and agency may be a wash, balanced out by the Judges and Sotos.
In exchange, it would seem that the new CBA would create a $1B pool to manage the salaries of these players under team control. Under this system, arbitration eligible players would divide a $1B pool based on formulas that consider their respective performance, age, and other characteristics. I won’t discuss in detail the implications of this arrangement on organizational theory where a decision to allocate salaries for a certain class of players across 30 competing entities implies a degree of collusive behavior and MLB operating as one anti-trust exempt service rather than as 30 constituent parts, but this system would replace the conventional arbitration process.
In the last season, arbitration eligible players earned $650M combined— although these salaries were determined through a conventional arbitration process. By taking this amount and adding $350M, MLB would add space for the Juan Sotos of the world who may go through “arbitration” 5, 6, or 7 times before they hit 29.5 years of age and are able to negotiate free agent contracts.
And while this creates some trade-off of increased earnings in exchange for control, the long-term effects are largely disastrous for players. First, the average age of an MLB star is decreasing. Players no longer hit their peak at 27 years old but are making their debuts earlier and reaching MVP levels sooner. The greatest source of surplus value in baseball on a production-to-dollars basis is this large pool of arbitration eligible players who are remarkably underpaid relative to their production. By broadening that pool of players, MLB creates a system by which these players will continue to be underpaid.
Moreover, 29.5 is a dangerous number since it’s awfully closed to a cursed 30. Under conventional logic, a player hits diminishing returns after crossing this threshold and their value on the open market is diminished. For Juan Soto, hitting free agency for the first time at 30 years old will not prove lucrative— nor will Soto have as many options-- and with his salary theoretically limited by the $1B pool in the preceding years, his career earnings will certainly be lowered relative to the current state.
Ultimately, this new system creates a reserve clause by another name. Players’ agency in where to player and ultimately their earnings are diminished. There are certainly some labor victories to be celebrated under these arrangements as service-time manipulation is eliminated, salaries for arbitration-eligible players rises slightly, and competitiveness and parity are improved. However, the negative effects of this system and potential long-term labor consequences are also evident.
I do not anticipate that this will be the last time we discuss the collective bargaining agreement and any rumored changes. In fact, as a labor-economics nerd who has a front row seat to potentially the most significant sports-labor issue of our generation this offseason, this blog will likely devote itself to analyzing the CBA piece by piece. So, all I have to say in conclusion is: buckle up because this offseason will be rocky if the above is any indication of the road ahead.