[Choi Min-gyu's Baseball Prism] Smarter MLB Teams... FA Salaries Are Dropping

Major League Baseball Player Salaries Decline for 3 Consecutive Years
Teams Becoming More Rational but FA Market Judged to Have Many Flaws
Players' Union Prepares for Labor Negotiations, but Changing Trend Hard to Reverse

[Image source=Yonhap News]

This year's Major League Baseball player market is overheated from the start. Marcus Semien, an infielder and teammate of Hyun-jin Ryu (Toronto), hit a career-high 45 home runs this year. On the 28th of last month (local time), he signed a long-term free agent (FA) contract with Texas for 7 years and $175 million (approximately 208.1 billion KRW). It is the twentieth largest contract in MLB history.

The day before, Tampa Bay gave shortstop Wander Franco a contract worth a total of $182 million (approximately 216.4 billion KRW). The duration is a whopping 11 years. Franco is a 20-year-old player who debuted in MLB this year and has played only seventy games. Tampa Bay is a "small market" team ranked 29th out of 30 MLB teams in market value as evaluated by the financial magazine Forbes.

On the 29th of last month, the New York Mets signed Max Scherzer, a three-time Cy Young Award winner, as a free agent for 3 years and $130 million (approximately 154.7 billion KRW). As a 37-year-old pitcher, the contract period is short. However, with an average annual salary of $43.33 million (approximately 5.15 billion KRW), he surpassed Gerrit Cole of the New York Yankees ($36 million) to set a new record for the highest average annual salary in history.

Kevin Gausman signed a 5-year, $110 million (approximately 130.9 billion KRW) contract with Toronto, and Corey Seager signed a 10-year, $325 million (approximately 383.2 billion KRW) contract with Texas, among others. Before December even began, seven contracts worth over $100 million in total were completed. Last year, there were three contracts worth over $100 million after the season, all made after January 19, crossing into the new year.

[Image source=Yonhap News]

The much faster pace of contracts than usual is largely due to difficulties in MLB labor negotiations. MLB has a collective bargaining agreement with the players' union that lasts five years. The agreement, which took effect in 2017, expires this year. If no agreement is reached, it will lead to a lockout. In that case, teams must maintain the player roster (40-man roster) as it was before the lockout. New contracts will be impossible. Because of this, players about to sign contracts and the teams coveting them need to hurry to finalize deals.

The side dissatisfied with the current agreement is the players' union. MLB player salaries have been on a downward trend for three consecutive years. Unlike previous negotiations, the players' union has taken a tougher stance this time. The average salary of the top 125 players this year is $18.4 million, a 2.6% decrease from the previous year. Most signed as free agents. The soaring FA prices of just a few years ago are now declining. This is a phenomenon that Korean professional baseball teams would envy greatly.

The academic field of sports management began with an economic paper titled "The Labor Market of Baseball Players" written in 1956 by Simon Rottenberg, an economist from the University of Chicago. Rottenberg identified the characteristic of the MLB labor market as a "monopsony." Before the FA system existed, teams had exclusive rights to contract with their players until retirement. Players had no freedom to transfer. This was called the "reserve clause." Teams enjoyed rents (compensation from holding exclusive rights), and players were exploited.

How severe was the exploitation? Marshall Medoff, a junior economist to Rottenberg, calculated the "monopsony exploitation rate" in 1976 by comparing actual baseball player salaries with their market values. For star pitchers, the exploitation rate reached 51%. Players received only 49% of their market value as salary. After MLB labor and management agreed on the FA system that year, the situation changed rapidly. According to a 1983 study, the exploitation rate for star pitchers was minus 72%. Under the FA system, the rent recipient shifted from teams to players. However, the exploitation rate for non-FA players did not change much after the FA system was introduced. There were even times when it worsened.

[Image source=Yonhap News]

The FA system is a kind of trade-off for players. In MLB, players must play for six years, and in Korean professional baseball, for 7 to 8 years, to qualify. Until then, they accept relatively low salaries and aim for a big break in the FA market. For teams, the problem is having to pay expensive salaries to FA players in their 30s whose skills may decline. Economics explains that profit is maximized when marginal revenue equals marginal cost. In the professional baseball labor market, it is ideal for salaries to be based on player ability and contribution. The current FA system does not reflect this.

In 1976, when MLB labor and management were negotiating the FA system, Oakland owner Charles Finley argued, "Let's give FA eligibility to all players." However, only one other owner agreed. In fact, the person most afraid of acceptance was Marvin Miller, the players' union executive director. Miller, an economics major and labor movement expert, understood that the more players entering a free competitive market, the more advantageous it would be for teams. Conversely, most owners, who did not want to lose "their players," wanted to minimize the number of FAs.

Today, MLB teams have become smarter and more rational than back then. Talents with Wall Street experience make decisions in team front offices. They spare no investment for top players like Scherzer. However, they judge the FA market itself to have many flaws. They prefer long-term contracts with future stars like Franco over FAs. They also increase interest and investment in the minor leagues. As a result, players who would have been in Double-A in the past are debuting in MLB one after another. When teams judge their strength to be declining, "tanking," which involves giving up on performance to focus on developing prospects, has become a common strategy.

The players' union is determined to revise the FA compensation system and prevent tanking. However, it seems difficult to go against the trend that teams no longer find the FA system attractive as before. It is reported that in negotiations, teams proposed granting FA eligibility uniformly to players who have reached 29.5 years old. The fear Marvin Miller had 45 years ago is materializing. Washington Post columnist George Will said, "In an era where vast amounts of information can be processed much faster, American baseball evaluates asset prices and allocates resources much more rationally. Resistance to such changes is foolish."

Director of the Korea Baseball Society

This content was produced with the assistance of AI translation services.