Are GMs Hurting the Owners Long-Term?

There is some evidence that young players are getting more and more productive and the aging curve is shifted to the left, but salary distribution has not changed. In fact, the average salary since 2005 increased 1.5 times, but the minimum salary increased only 1.3 times, which means the young guys earn less despite producing more. Young guys are getting exploited by the owners. Of course there are extreme examples like Trout in 2012, who earned a little more than $500K but was worth roughly $65M using $6.5M per win, but it is pretty clear that on average the young players are getting underpaid.

Now it is pretty easy to blame the owners for that, but in reality that was by design. The union agreed to all that and they did it on purpose. The veterans have the power in the union and they were selling the young players to keep their own earnings up. Veterans in baseball are in a pretty privileged position. Baseball is pretty much the only major US sport without a salary cap, and there is also no maximum salary, and contracts are guaranteed. Basically, owners and the union had an agreement (you could almost say a collusion) in which they both exploited the young players to keep their revenue up.

That system wasn’t really fair toward the young players, but it did work. The baseball union was always criticized for being weak, but they always got what they wanted; it basically was a teamwork between owners and veterans which kept labor peace preserved for almost 20 years now.

However, now that system is put in danger. GMs are getting smarter, and they try to increase their value for the dollar. Top veterans are still getting paid, and actually better than ever. There are rumors that Bryce Harper will be the the first $500M player; however, it seems like the role of the mediocre veteran is diminishing. Older non-great players seem to struggle getting contracts, especially if they are of the slower slugging variety. 30 homers used to sound good, but if by WAR the guy is only worth 1.5 wins, the GMs prefer to not give him $10M, but instead get a guy to play for the minimum who might produce only 1.2 WAR but for a tenth of the salary. That is a very smart practice by the GMs because it increases the value/$ a lot.

GMs were criticized for giving $100+M contracts to declining veterans and at times those contracts do look terrible, like in the case of Albert Pujols, who will get paid $30+million a year for a couple more years for basically replacement-level or below value. Now, those contracts are very bad (even though often they are not as bad as you think considering the current $/WAR price), but still, overall, the owners are saving a lot of money. Salaries do still go up, and faster than inflation, but since the mid-2000s the players’ share of overall revenue went down drastically. Now teams probably do invest more into analytics, staff, and player development, but still that is only a small piece compared to the huge jump in overall baseball revenue, and most of the money is pocketed by the owners.

The media and fans did help the owners a lot by painting the picture of the overpaid MLB player, but in reality that applies to only a small percentage of players. Last year 133 players made more than $10M per year, but there were well over 800 players playing, and more than half of them make less than $1.5M. You would guess that compensates the owners for paying Pujols $30M for nothing, and A-Rod for not playing at all! Basically, that slight overpaying of veterans was the fee the owners had to pay to the union for them agreeing to the system.

I’m not blaming the owners, as they invested billions, and they should make some profit out of that (as long they are not running the team on the cheap and basically make their profit just based on revenue sharing…) and I’m also not blaming the union for prioritizing the veterans, but that system might have outlived itself now. If the GMs continue to squeeze the lower-end veterans hard without giving something else back, they might force the union into another strike that nobody wants. There used to be a very delicate balance between union and owners, making sure that labor peace has now been kept for almost 20 years, making both sides very happy and rich, but that balance is in danger now. The union doesn’t want a strike, but if the players’ share continues to go down, they might be forced to do that if the owners don’t give something else back.

Of course the union is to blame for that problem too. They were thinking short0sighted by just focusing on veteran salaries, and thus making young player labor so cheap, which incentivized the GMs to target the young players so much. Short-term, the veterans made more money that way, but just like a fisherman fishing too many fish, they were hurting themselves by pricing themselves out of the market.

Now there are two possibilities for how this could end:

1. The owners could force their GMs to be market inefficient and overpay veterans more, and give more of them a job to keep the veterans happy. Of course that could only happen if all owners agree so that no single teams get a disadvantage by doing that. You could do that by agreeing to have a certain minimum number of veterans on the team, for example, or you could increase the salaries at the top end. Of course that has implications too, as that might have a negative effect on league quality (bad veterans just kept around to fulfill a quota), and it also might hurt the intra-union peace as the young guys would get squeezed even more, and that might cause them to riot.

2. The young guys could take over more power in the union, causing the earnings of the younger guys to go up. Raising the minimum salary would be a possibility, although even at like $1.5M they probably still would be underpaid. You could also increase arbitration salaries, and finally you could shorten service time requirements. A good thing probably would be to stop service time manipulation to prevent teams from getting a seventh control year. For example, instead of days of service time, you could say every year the player played in MLB is a service year (maybe except September call-ups from that). Of course that could delay some prospects that actually have the talent to play in MLB, but it would give more veterans a job, and also make things like exploiting the DL and shuttling between minors and majors more costly. Of course there are also disadvantages to that. As I mentioned, talented players would be held back for sometimes up to like 3/4 of a season (although it could also accelerate other very good prospects that are clearly ready by half a season), and shorter control also could hurt competitive balance because small-market teams can’t keep their core around as long as they used to.

Overall, this is a very serious problem that is not going away, and eventually probably will lead to a big clash. There are possible solutions, but each of them also has some negative implications, so this is not an easy to solve problem.