Free Agents' Impact on the Labor Market for Baseball Players*

HENRY J. R A I M O N D O

Rutgers University, N e w Brunswick, N J 08903

This paper evaluates the 1976free agent rule's impact on the labor market for baseball players. Free agency has specific consequences for monopsonistic exploitation and racial discrimination in salary determination. It reduces monop- sonistic exploitation for all players and increases salary opportunities for black and Latino players. However, this change in a player's status vis-b-vis a team has generated salary disparities among players based, not on race, but bar- gaining position.

I. Introduction

Professional sports, particularly baseball, have attracted much economic research through the years. Baseball's special legal status and complex off-the- field operating rules which limit competition make the sport a popular example of an enduring cartel. The reserve clause which restricted a player's freedom in the labor market was one source of the team owner's economic power. It divided the labor market into a submarket for each team and granted the team exclusive bar- gaining rights with the players in its submarket. ~ In July, 1976, a labor arbitrator overturned the reserve clause. The decision has since been incorporated into the players' contract with the team owners.

This paper attempts to evaluate the impact of this change on two problems discussed in previous economic analyses of the baseball players' labor market: first, the monopsonistic exploitation of baseball players; and, second, racial dis- crimination in baseball salary determination. Results of the analysis of these two topics based on selected 1977 baseball players will be compared to the earlier find- ings for the completely restricted labor market.

*I would like to thank Linda Kammann, Mary O'Brien, and Benjamin Preston for their research assistance. Also I wish to thank John Siegfried and an anonymous referee for their comments. I remain solely responsible for the contents of this paper.

~A description of the cartel powers of major league baseball teams is provided in Noll (1977), pp. 365- 400. Other work has argued that the reserve clause is not necessary to maintain team balance through- out the league. See EI-Hodiri and Quirk (1971), pp. 1302-19.

JOURNAL OF LABOR RESEARCH Volume IV, No. 2 Spring, 1983

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II. Monopsonistic Exploitation o f Baseball Players

Monopsonistic exploitation is the situation where a productive input, in this case a baseball player, is paid less than its marginal revenue product (MRP). It can take many forms. One of the more paradoxical is the notion that a team owner is exploiting a baseball player who earned on average $76,000 for the 1977 season. ~

However, Rottenberg (1956) showed that a profit-maximizing team owner could behave like a discriminating monopsonist by maximizing the rent derived from each of his players. The reserve clause encouraged such behavior, since players have little bargaining power. Gregory (1956), Neale (1964), Demmert (1973), Hunt and Lewis (1976), and NoU (1977) have confirmed and extended Rottenberg's work. Efforts soon began to quantify this monopsonistic exploita- tion. Davenport (1969), ScuUy (1974a), Medoff (1976), and Scoville (1976) tried to measure the rate of monopsonistic exploitation in the baseball labor market. Since the Scully and Medoff papers are the most comprehensive, this paper con- centrates on their methodologies.

Measuring the Rate o f Exploitation. Scully constructed a model of MRP and salary determination using data for the 1968-69 season. His two equation model for the calculation of MRP first measured the effect of player performance on team winning and, second, the effect of team winning on team revenue. This allowed him to calculate individual player's MRP. ScuUy then estimated a salary determination model which related player performance to salary level. A rate of monopsonistic exploitation (RME) was then derived, where

RME = (1 - (Salary/MRP)) (1)

Scully concluded that under the reserve clause in the 1968-69 season players received 9-12 percent of their economic worth depending upon position and performance.

Medoff built upon Scully's analysis by selecting some new player produc- tivity variables, using more recent data, and changing the statistical technique to eliminate the simultaneity between the dependent variable in Scully's first equa- tion and the error term in his second equation. Medoff concluded that under the reserve clause in the 1972-74 season players received between 30 and 50 percent of their economic worth depending upon position and performance.

Free Agents and the Rate o f Exploitation. The abolition of the reserve clause for veteran players should have two effects. First, the team owners should offer these players a salary based on their expected MRP. Whether the salary is equal to, greater than, or less than the MRP depends upon the player's bargaining power. It would not be surprising for a free agent to receive more than his MRP, because with several teams bidding for him, there is likely to be a random distri- bution of bids around the actual MRP. This comes about because of errors in the

2The Sporting News, (January 8, 1978).

HENRY J. RAIMONDO 185

expected M R P (Cassing and Douglas, 1980). The player would select the highest bid, ceteris paribus. Second, team owners may also be expected to bring their salary offers to non-free-agent players in line with their MRP's. Otherwise, a player would become a free agent as soon as he was eligible. Again, this will depend upon the player's bargaining power.

To test these two effects, baseball players' salaries were collected for the starting players in the opening day of the 1977 season. In addition, estimated salaries for the free agents (1977-79) were included in this sample. 3 This resulted in 262 players (223 hitters and 39 pitchers). The Scully and the Medoff equations for MRP were adjusted for inflationary increases to the appropriate year and compared to the player's actual salary. The use of these M R P equations assumes that the performance-salary relationship is unchanged from the Scully and the Medoff findings. This procedure allowed an estimation of the rate of exploitation which is still present after baseball dropped the reserve clause.

Table 1 uses the Scully and the Medoff classification scheme for career per- formance and distributes the total sample (262), the non-free agents (216), and the free agents (46) over the six classes. In addition to the expected result that the free agents earn on average more than their non-free agent counterparts ($398,000 vs. $85,000), this information permits the calculation of the RME by career performance and by salary negotiation position (non-free agent vs. free agent), and a comparison with the Scully and the Medoff R M E estimates.

The RME has generally decreased. For example, prior to the 1977 season, mediocre hitters received between 12 and 30 percent of their economic worth. In

Table 1

Rate o f Monopsonistic Exploitation for Starting Players, 1977 a

Previous Estimates Total Players Non-Free Agents Free Agents Career Performance b Scully Medoff Scully Medof f Scully Medoff Scully Medoff

Mediocre Hitter .88 .70 .85 .51 .85 .52 - - .45 Mediocre Pitcher .91 .45 .32 .33 .74 .40 - . 0 8 .16 Average Hitter .89 .64 .81 .55 .85 .66 .31 .12 Average Pitcher .89 .49 .22 - . 1 4 .63 .51 - . 1 0 - . 8 1 Star Hitter .89 .59 .52 .21 .70 .56 .05 - . 0 3 Star Pitcher .88 .51 .51 - . 2 1 .63 .39 .08 - . 7 2

aRME is estimated for each player using equation (1). bSee Scully (1974a) and Medoff (1976) for the description of the career performance classifications. See footnote 3 for data sources.

3Salary data were collected from the following sources: The Newark Star Ledger, (April I0, 1977), Section 5, p. 4; TheNew York Times, (January 23, 1978), p. C-9; and (June 19, 1978), p. C-1; and (February 11, 1979), Section 5, p. 1.

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1977 they received between 15 and 48 percent; and as free agents 55 percent. Free agents fared better than non-free agents in receiving their earned wage. This find- ing would be consistent with the position that free agents are able to make team owners compete for their talent and, consequently, bid up their salaries. In 5 of 11 cases, free agents actually received more than their MRP's (3 to 72 percent). Non- free agents also reduced their RME. These players could threaten to become free agents rather than accept the salary offered by their present teams. This could force the team owner's salary offer to approach the player's MRP. Over time the free agent option could reduce the RME for non-free agent players.

For the 1977 labor market for baseball players, ScuUy estimates support the conclusion that for the non-free agents mediocre (.85), average (.85), and star (.70) hitters and mediocre pitchers (.74) are significantly exploited, whereas Medoff's support the conclusion that average (.66) and star (.56) hitters receive less than their MRP. While the establishment of the free agent rule has reduced the RME, the impact varies with career performance. For the free agents, the Scully estimates indicate that average hitters (.31) and the Medoff estimates indicate that mediocre hitters (.45) are receiving significantly less than their economic worth.

Besides the reduction in RME for all players, particularly free agents, the distribution of income among baseball players has become slightly more unequal. For example, Scoville (1976) showed that the percent of players earning over $120,000 has increased from 2.5 percent in 1973 to 4.5 percent in 1975. This sample shows 39.3 percent (103/262). Even if all the players not included in this sample, but in the major leagues, earned less than $120,000, the percentage (16.5 percent) would be far greater than Scoville's estimates. This high salaried group has slightly increased the ratio of mean to median salary (1973 - - 1.35; 1975 -- 1.34; and 1977 - - 1.74). This growing inequality provides some evidence that free agency is gradually moving in the direction of a salaried elite in cleats.

III. Racial Discrimination in Baseball Salary Determination

Rosenblatt (1967) in a general essay and Scully (1973 and 1974b) in an ambitious statistical analysis concluded that "racial wage discrimination is a feature of the baseball labor market ." ' Scully's conclusion was contrary to the Pascal and Rap- ping (1972) and Medoff (1975) statistical result which indicated that "race had no significant impact on salary when considered in conjunction with 'objective' measures of player value.' '~ This section of the paper will test for racial discrimi- nation in the baseball labor market by estimating regression models which relate a

'Scully (1974b), p.268.

5Pascal and Rapping (1972), p. 149. Also, see Scully's (1974b) criticism of the Pascal-Rapping methodology, p. 267.

HENRY J. RAIMONDO 187

player's salary to his performance. Further, players will be divided into free agents and non-free agents to discover the impact of this legal change on any alleged racial discrimination.

Salary Determination and Player Performance. ~ A player's salary is a func- tion of his performance. Because measures of performance vary by position, players were divided into three groups: outfielders, infielders, and pitchers. Data on performance were collected from the Baseball Encyclopedia (1976).

A. Outfielders - - For outfielders the salary determination model is:

Log (SALAR Y) = ao + a1SPC + a2REG + a3IND + e (2)

where

S A L A R Y is the salary level in the 1977 season. It is assumed that returns to player performance increase at a diminishing rate so that the dependent variable is the natural log.

SPC is a player's average slugging performance (total bases divided by at- bats) over his career times 1,000. The hypothesized relationship between S A L A R Y and SPC is positive. SPC means team victories and exciting baseball. Fans are willing to pay for both.

REG is the years a player has been a starting regular. The hypothesized rela- tionship between S A L A R Y and REG is positive because the player is a reli- able member of the team who consistently contributes to team performance.

IND is an indicator variable which assumes the value 1 if a player has a career slugging percentage below average and a career batting average above average. Otherwise, it is 0. The hypothesized relationship between SALAR Yand IND is positive. Some players have low SPC, but contribute to team victories with a high batting average. This indicator variable accounts for that.

Table 2 gives the regression results for equation (2) for all outfielders by race and by salary negotiation status. The few observations for the black/Latino free agents regression analysis should be noted. We find that: (1) The expected rela- tionship for SPC is confirmed and statistically significant in all models except for black/Latino free agents. White players apparently receive more for an increase in SPC than non-free agent black or Latino players. (2) The expected relationship between S A L A R Y and REG is confirmed and statistically significant in all models except for non-free agent white outfielders (not statistically significant) and free agent black or Latino outfielders. Black or Latino outfielders who are not free agents apparently receive more for each additional year of playing service

"This section draws on the methodology of Pascal and Rapping (1972), ScuUy (1974a and b), and Medoff (1976).

188 J O U R N A L OF L A B O R R E S E A R C H

Table 2

Regression Results for Outfielders

Dependent Variable: Log (SALAR y)a

Race and Salary Coefficient of Degree of Negotiation Status Constant SPC REG IND Determination Freedom

White - - Tota l 7.954* .007* .078* .123 .69 16 (11.33) (4.19) (2.54) ( .41)

Non-Free Agents 8.256* .007* .079 - .278 .82 14 (15.85) (4.94) (3.52) ( - 1.13)

Free Agents INSUFFICIENT DATA

Black/Latino - - Total 9.391" .004* .126" - .195 .41 58 (18.01) (2.89) (4.00) ( - .77)

Non-Free Agents 9.919" .002* .141" - .011 .63 48 (31.81) (2.01) (7.31) ( - .07)

Free Agents 10.354" .007 - .061 - .155 .65 6 (6.48) (1.89) ( - 1.24) ( - .27)

aValues in parentheses are t statistics. *Statistically significant at the 5 percent level.

than white players. 7 (3) The relationship for IND is not statistically significant in any model and the expected relationship is found only in the white outfielder model. (4) The coefficient of determination varies from .41 to .82 for the five esti- mations. (5) There were insufficient data for the white free agent outfielder salary determination model.

A comparison of these relationships across outfielders grouped by salary negotiation status and by race illustrates the impact of these variables. Assume that SPC varies while the other variables are set equal to the mean value of the entire sample. For outfielders grouped by race regardless of salary negotiation status, black or Latino outfielders seem to earn more than their white counter- parts until a .540 slugging percentage is reached. Even if we divide the outfielders into non-free agents and free agents and then compare, non-free agent black or Latino outfielders still earn more than their white outfielder teammates until a .400 slugging percentage is reached. Performance levels after that point appar- ently favor white outfielders. Black or Latino free agents receive remuneration in

'Scully also found a similar result. He suggests the differential impact may be caused by an "experi- ence effect" for which black and Latino players earn more; a retention barrier for black and Latino players; and the less attractive opportunities outside baseball for black and Latino players. See Scully (1974b), pp. 263-4.

HENRY J. RAIMONDO 189

excess of non-free agents. This is consistent with the earlier findings on monopso- nistic exploitation. The introduction of the free agent rule has enabled talented black or Latino athletes to reduce the effects of monopsonistic exploitation and racial discrimination in salary determination. However, non-free agent black or Latino outfielders with slugging percentages greater than .400 appear to suffer in salary negotiations.

While these findings would apparently support the case for race discrimina- tion in baseball salary negotiations under some circumstances, the conclusion is not straightforward. A test on the equivalence of regression coefficients across data sets shows that the null hypothesis that the coefficients are equivalent cannot be rejected. Therefore, the appearance of racial discrimination in salary deter- mination for outfielders cannot be statistically supported.

B. Infielders ~ For infielders, the salary determination model is:

Log (SALAR Y) = Bo + BIBA C + B2REG + e (3)

where

S A L A R Y is the salary level in the 1977 season. B A C is the player's lifetime batting average. The hypothesized relationship

between S A L A R Y and B A C is positive. A player with a high BAC con- tributes to team victories and entertaining baseball. Both attract the fans and raise the player's MRP. For infielders, B A C was more closely associated with S A L A R Y than SPC.

REG is the years a player has been a starting regular. The hypothesized rela- tionship is positive.

Table 3 gives the regression results for equation (3) for all infielders by race and by salary negotiation status. The few observations for the white free agents regression analysis should be pointed out. The results of the estimates of the model for infielders are: (1) The hypothesized relationship between S A L A R Y and BA Cis supported and statistically significant in each of the models except for the model for white, free agent infielders. White infielders apparently receive more than black or Latino infielders for an increase in BAC. (2) The expected relationship between S A L A R Yand REG is supported and statistically significant in all estimations except for white free agents. White players apparently earn more than black or Latino players for each additional year in the major leagues as a regular. (3) The coefficient of determination varies f rom. 19 to .54 in the five estimations. (4) There were insufficient data for an estimation of the model for black or Latino free agents.

Again a comparison of these relationships across infielders grouped by salary negotiation status and by race show the impact of these variables. Assume that BA C varies while all other variables equal the mean values for the entire sam- pie. Under these conditions, white infielders apparently receive more than their black or Latino teammates. If white free agents are removed from the compari- son, the apparent difference between white and black or Latino infielders dimin-

190 JOURNAL OF LABOR RESEARCH

Table 3

Regression Results f o r Infielders

Dependent Variable: Log (SALAR lO a

Race and Salary Coefficient of Degrees of Negotiation Status Constant BAC REG Determination Freedom

White - - Total 7.735* .010" .140" .40 83 (11.45) (3.90) (5.75)

Non-Free Agents 8.746* .006* .120" .41 71 (16.61) (2.96) (6.28)

Free Agents 11.841" .001 .070 .19 9 (5 .17 ) ( . 1 6 ) (1.20)

Black/Latino - - Total 8.328* .008* .116" .53 52 (13.53) (3.01) (5.28)

Non-Free Agents 8.892* .005* .117" .54 49 (15.48) (2.17) (5.78)

Free Agents INSUFFICIENT DATA

aValues in the parentheses are t statistics. *Significant at the 5 percent level.

ishes, although the salary differential still seemingly favors white infielders.

While these findings would apparently support a case for racial discrimina- tion in baseball salary negotiations, the conclusion cannot be statistically con- firmed. A test on the equivalence of the coefficients across data sets shows that the null hypothesis that the coefficients are equivalent cannot be rejected.

C. Pitchers - - Data were only available for opening day pitchers. This lack of observations reduces the degrees of freedom throughout the analysis. The small number of pitchers (non-free and free agents) is insufficient to directly test for discrimination in salary determination. There are, however, enough data to speculate on the influence of race on salary. The model for pitchers is:

Log ( S A L A R II) = Co + C1S W + C2 + C3PCTIP + e (4)

where

S A L A R Y is the pitcher's salary level for the 1977 season in natural log form.

S W i s the pitcher's ratio of strike-outs to walks over his career. It is assumed that the relationship between S A L A R Y and S W is positive. A high S W means the pitcher is effective stopping the opponent's offense. This con- tributes to team victories and fan support.

E X P E R is the pitcher's years in the major leagues. The expected relationship between E X P E R and S A L A R Y is positive.

HENRY J. RAIMONDO 191

PCTIP is the share of the team's pitching handled by the player in question. The expected relationship between S A L A R Yand PCTIP is positive. This is a measure of the player's importance to the team.

Table 4 gives the regression results for equation (4). The results of the estimates of the model for pitchers are: (1) The expected relationship between S A L A R Y and S Wis supported and statistically significant for the total free agent and the white non-free agent estimations. Non-free agent pitchers are compensated at a greater rate for any increase in SWthan free agent pitchers. (2) The expected relationship between S A L A R Y and EXPER is confirmed and statistically significant for the total free agent and the white free agent estimations. Free agent pitchers are com- pensated more for each additional year of experience than their non-free agent counterparts. (3) The relationship between S A L A R Y and PCTIP is confirmed and statistically significant for the estimation of total free agents. Non-free agents receive more than their free agent teammates for any percentage increase in the share of innings pitched. (4) The coefficient of determination for the four estimations of equation (4) varies from .50 to .73,

As in the case of outfielders and infielders, there is not a statistical case for the view that there is racial discrimination in the salary determination for pitchers.

Table 4

Regression Results for Pitchers

Dependent Variable: Log (SALAR y)a

Race and Salary Coefficient of Degree of Negotiation Status Constant SW EXPER PCTIP Determination Freedom

Total Non-Free Agents 9.843* .394* .026 4.877 .62 19 (27.01) (2.25) (1.03) (1.32)

Total Free Agents 11.536" .162 .060* 3.626** .51 15 (32.78) ( .96 ) (2.23) (1.89)

White Non-Free Agents 9.315" .562* .036 5.828 .73 13 (22.54) (3.07) (1.51) (1.57)

White Free Agents 11.494" .202 .065** 2.599 .50 12 (30.22) (1.04) (2.11) (1.29)

aValues in parentheses are t statistics. *Significant at the 5 percent level.

**Significant at the 10 percent level.

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IV. Conclusions

This paper evaluates the 1976 free agent rule's impact on the labor market for baseball players; specifically, its impact on two aspects of this labor market: monopsonistic exploitation and racial discrimination in salary determination.

On the question of monopsonistic exploitation, the free agent rule has: (I) Reduced monopsonistic exploitation overall, except that players in the lower per- formance categories are still not receiving their economic worth in pecuniary terms. Free agents, on the other hand, are receiving on average more their estimated economic worth. (2) Created disparities in salary levels between free agents and non-free agents. This situation has resulted in a growing inequality in the baseball salary distribution.

On the question of racial discrimination in salary determination, the free agent rule has: (1) Enabled black or Latino athletes who are free agents to receive higher incomes. Generally, they receive at least as much as their white counterparts and more than their black, Latino, and white teammates who are not free agents. (2) Left some appearance of salary differentials by race. However, there was no statistical support for a claim of racial discrimination in salary determination.

Supporters of the free agent rule should be pleased with these results because they verify the direct salary benefits to the players who have declared themselves free agents and because they argue for complete elimination of all restraints in the labor market for baseball players.

H E N R Y J. R A I M O N D O 193

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