Tuesday, August 13, 2013

The MLB Anomaly: Part 2

In the previous post on lockouts I wrote that MLB is immunized from lockouts due to a combination of its progressive revenue sharing scheme and that they impose a tax system, rather than mandated spendinrestraints, for regulating payrolls. Both work to placate the small market owners who drive the labor unrest in the other leagues. I am following up on the discussion of revenue sharing in the last post with an examination of the effect of payroll regulation methods here.

MLB differs from each of the other major American professional leagues in that payrolls are not regulated so that all club’s wage bills fall within mandated upper and lower bounds, better known as the salary cap and salary floor. Under the payroll tax (officially competitive balance tax) system, MLB clubs are free to choose the level of payroll that suits them; although they are subject to financial penalties when exceeding the tax threshold. Yet most important to labor peace is that, besides meeting the required obligations to individual players, there is no minimum payroll criterion. All clubs, including the low revenue producers, have full discretion over their wage bill. Despite the freedom of clubs to spend as much or as little as they choose on player salaries, the portion of total MLB revenues going to players (52.6% last year per Forbes data) is very similar to the other leagues. In fact the revenue sharing-payroll tax system has been as effective in reducing payrolls in MLB as the rigid cap mandates of the other three, as each league has seen the players’ share fall from more than 60% to about 50% of total revenues since the 1990s.  (JohnSolow and Tony Krautmann provide an economic explanation of the effect of MLB's revenue sharing method on payrolls.) Nevertheless, in MLB club payrolls correspond quite well with club revenues, while in the other leagues low revenue producers spend a much higher portion of their revenues on player salaries than their large market peers.

A closer, club-by-club, look at the numbers shows why MLB’s small market owners are much more content than their capped-league counterparts. I've compiled a table, using the most recent year’s Forbes data (2012) from their club valuation reports (by way of Rod Fort’s sports data collection), which orders the clubs in each of the four leagues by the calculated percentage of total revenue paid to their players (player costs). Columns showing each club's total revenue and its revenue rank are also included for each league. In MLB eight of the ten highest player-share clubs are also in the top ten in revenue generation, while seven of the ten lowest in player share are from the bottom ten in revenue production. The other leagues show almost exactly the opposite pairings. In every case the clubs with the lowest revenue rankings have the highest player shares and vice versa.  In fact, the inverse correlation between revenue and payroll is tighter for the three capped leagues than the direct correlation is for MLB. The NHL data, which represents the pre-lockout splits, best illustrates the inherent volatility. Not only is the league’s total share to players the highest at 59%, but five clubs dished out more than 70%—one, the Islanders, more than 80%—of their earnings on player costs. Only one club (NFL’s Raiders) in the all of the other three leagues combined paid out as much as 70% of their revenue in salaries. Their newly settled CBA should make the NHL’s distribution similar to the NBA’s current numbers next year. Notwithstanding, the revenue-to-payroll imbalance implies that both of these leagues, and to a lesser degree the NFL, are far more prone to a lockout at expiration of their current CBAs than MLB.

One last and related thing: if you are convinced that the cap and floor system are the better way to regulate competitive balance (distribution of talent) then I’m afraid what you know just ain’t so.

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