MLB Labor Talks: What’s at Stake

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Baseball owners (MLB) and the players’ union (MLBPA) are in the process of negotiating the next collective bargaining agreement (CBA) for their sport. The current one expires on December 1. Those talks are governed by federal law. Both sides are required by the National Labor Relations Act to engage in good faith bargaining over wages, hours and working conditions. Let’s analyze the main issues they’ll be working to resolve.

Dividing the Pile of Money

Prior to the COVID outbreak, revenues had been pouring into professional baseball at an increasing rate, reaching more than $10 billion in 2019. The pandemic set that back. In 2020, the number of regular season games was cut to 60 and played without fans in attendance. The sport’s revenues dropped to $3.7 billion.

Revenue figures haven’t been released for 2021 yet. All 162 regular season games were played, plus a lucrative postseason. Attendance was limited in early months due to state and local health regulations. But parks opened to fans faster than had been anticipated.

The sport has its challenges – pace of play, failure to win over younger fans – but also new opportunities for revenue streams. The financial future of the sport is worth investigating, but not for this issue. From the standpoint of a CBA that begins with the 2022 season, it’s safe to assume overall revenue will return to its pre-COVID trajectory.

The players’ share of baseball revenue has been shrinking. Average player salary has declined from $4.1 million in 2019 to $3.7 million in 2021. As you can see from the data (Graph 2) that drop is part of an overall reversal for players under this CBA. Salaries have fallen by 6.4% since the start of the 2017 season.

While this trend was aggravated by the COVID epidemic, falling salaries have roots elsewhere. Informed by data showing performance peaks earlier than previously thought, teams are relying more on young talent. Under the six-year reserve clause in the current CBA, those players also tend to be less expensive because of team control.

I wrote this more than three years ago:

“Players are no longer turbocharged on steroids and amphetamines. Many slam into rapid decline in their early- to mid-30s. Old-school owners and GMs didn’t get the memo and turn their battleships around fast enough. They continued to pursue extravagant, headline-grabbing deals with famous veterans. Trophy signings were so burdensome to competitiveness the overall correlation between payroll spending and wins vanished.

A new generation of younger general managers, armed with data, know better. People making personnel decisions in baseball’s front offices grasp the poor average return from free agent contracts. Toss in a few other factors and you get a collapse of the free agent market.”

It used to be that players could finish their six years of team-controlled service and count on multi-year free agency deals that rewarded their successes. Now, organizations understand that you should pay for what the player will do in the future, not what he’s done in the past.

A few superstars still get huge, long-term contracts. But many “middle-class” veteran free agents have found themselves facing depressed or non-existent markets for their services. The average salary is inflated by a few gigantic contracts. The median player salary is less than half the average.

The central issue MLB and MLBPA must resolve is how to get more money in the hands of players in the early part of the arc of their careers. That will prove difficult because fine-tuning the current structure won’t get it done. Teams can’t (and shouldn’t) be forced to pay non-productive players more. Players will have to acknowledge the reality that for many of them, late-career paydays are a thing of the past. Players and owners will need to agree on fundamental changes in the structure for how players are compensated to get more money to players when they are younger.

There are ways to do this, but they involve greater costs for owners and hard trade-offs for players.

Ambitious examples include a significant boost to league minimum salaries, possibly up to $1 million over the course of the next CBA; a lower service time threshold for arbitration; a lower service time threshold for free agency (a weakening of the reserve clause).

Owners have proposed elimination of arbitration with creation of a $1 billion pool to pay arbitration-eligible players. They have also proposed all players become free agents at the age of 29.5. Basing free agency on an age trigger would address the issue of service time manipulation, where teams delay promotion of a player to postpone its start.

An age-29.5 trigger would hurt the best (highest payroll) player because they are called up when younger. A player like Bryce Harper or Juan Soto would be under team control for TEN years. Most players are past their peak by age 29.5 and would still miss big veteran contracts.

One hybrid solution would be to adopt the age-29.5 rule (or some age-based trigger) with the current six-year rule and say a player becomes a free agent by either one, whichever comes first.

Deciding What Counts as Revenue

Bargaining agreements for the NBA, NHL and NFL specify the percentage of revenues that should go to player salaries. Those shares are around 50%. The theory behind explicit revenue sharing is that when revenues go up, players’ salaries go up, too.

The reason baseball doesn’t have that type of arrangement is the union has always rejected it. They don’t trust the owners to make truthful disclosures of revenues.

Compounding the problem with dividing revenue is a lack of agreement on what should be counted. Major league teams have branched out and earn money in ways that aren’t “baseball related” but aren’t divorced from baseball either.

Two examples:

(1) Many teams have negotiated ownership shares of their regional sports networks. Teams say that is “media” revenue, not “baseball” revenue and shouldn’t be shared with the players.

(2) Teams have become involved in real estate development near the ballpark, such as bars, restaurants and condominiums. Those properties have value because of the baseball team (and its players) but aren’t considered “baseball” revenue and owners won’t put them in the player-share calculation.

One sticking point in the negotiation is that players want owners to reveal their gross revenues from their side gigs.

Payroll Caps

Other professional sports leagues have negotiated payroll caps – hard limits on the total amount a team can pay its players. Most owners like this arrangement because it limits what they can and are expected to spend. But salary caps have a second appeal – they promote competitive fairness by preventing a few teams from spending a lot more than others.

Baseball doesn’t have a hard salary cap because the players oppose it. They think a cap would limit salaries, particularly for superstars. They’ve reasoned those ultra-high salaries are good for all players because they slide the pay scale up for everyone. (This is an example of outdated thinking by the players because the weakened free agent market is no longer generating that ripple effect from the superstar contracts.)

What baseball does have is a soft cap. It’s called the Competitive Balance Tax and its details are set in the CBA. Teams can spend whatever they want, but over certain thresholds they face stiff penalties. When teams spend over a certain amount on payroll, they are subject to escalating penalties.

The current CBT starts at $210 million with a 20% tax. In 2021, the average team payroll was $130-132 million. (The Reds were a couple million below that.) Punishment is more severe for repeat offenders and includes taxes that used to be called “luxury” taxes, plus possible loss of draft picks and forfeiting revenue sharing.

Tanking and Payroll Floors

Tanking is when teams don’t make a legitimate effort to field a competitive team. The practice has gotten worse every year. Twelve of the 30 major league teams had 2021 payrolls below $100 million. Teams tank to improve their draft position and to cut expenses.

Players rightly complain that tanking hurts player salaries. Overall, payrolls are lower because of it. Beyond that, both sides realize tanking is bad for the sport. It causes fans to lose interest in those teams and makes for competitive imbalance. Consider the 2021 Chicago White Sox who were in a division where each of the other four teams sliced payroll by an average of $20 million.

The current CBA requires organizations that receive revenue sharing funds to spend that money on their payroll. But it’s hard to enforce and still not enough to force the fielding of a competitive team.

A payroll floor system that matches the payroll cap structure is one solution. Teams that fall below a certain payroll threshold could be taxed and suffer other penalties. There are reports that in August the league proposed a CBT threshold of $180 million with a salary minimum of $100 million. Salary minimums would be calculated on the average annual value of contracts on the 40-man roster plus $15 million or so in player benefits.

Salary caps and floors are an obvious area for a negotiated solution. The union could agree to stricter enforcement of a lower salary cap if owners agree to the same for a meaningful salary floor.

Other possible solutions to tanking involve changes to the revenue sharing system such as allowing smaller market teams to keep a higher percentage of their ticket revenue. A lottery for the first few draft picks might slow down the race to the bottom.

Postseason, DH and Worldwide Draft

Each side has its list of issues. Owners want an expanded postseason, representing a gigantic financial windfall. Players have withheld support for this to now. But you can expect more teams in the postseason will be one of the union’s largest concessions to the owners.

Owners also want international players included in a draft so they can avoid free agent-style competition for those players. The union has refused to modify the draft that way so far.

In the past, players have advocated for a universal DH with the premise that it would create a dozen or more new jobs for well paid veteran players. Among American League teams, where the DH has been used since 1973, designated hitters have the highest average income.

But the DH has lost juice as a sticking point. Owners don’t want to see their pitchers risk injury while batting and running the bases. Those veteran designated hitters aren’t so well paid any more thanks to the collapse of the free agent market. Expect to see the universal DH adopted, but it won’t be a big owner concession like it would have been in the past.

Wrap Up

Those are the main issues the two sides will wrangle over the next few weeks. Many are interrelated. They are significant hurdles to an agreement. At least the issues are familiar ones to both sides.

It’s both good and bad news that the fundamental issue is money and a lot of it at stake. The players have fallen behind in recent years relative to where they were. So, the needle will have to move in their direction. That means owners will have to reduce their ample share a bit. A gang of billionaires may prove difficult to budge.

On the other hand, it’s not like one side or the other is being asked to sacrifice a hallowed, intangible principle. Yes, money is vitally important. But with cash, you can split the difference.

That’s especially true if revenues are large and growing.