Baseball and Labor Markets

Numerous Major League Baseball teams have signed young players to long-term deals recently. Yesterday the Milwaukee Brewers signed Ryan Braun to an eight-year, $45 million deal by the Milwaukee Brewers. At under $6 million per season, that’s a bargain if Braun merely puts up similar numbers (.313 with 44 homers and 127 RBI in 153 games) to his first full year in the majors, which he won’t reach until late next week. Baseball contracts are guaranteed, so the contracts to players whose career busts will be a significant mistake (e.g. Pat Burrell’s contract with the Phillies). But the upside is more than defensible.

(Braun is also an interesting example because he developed in the Brewers’ minor league system as a third baseman. His copious errors last year, his rookie season, forced the Brewers to convert him to left field this year. Do 41 games and spring training constitute sufficient evidence that he can be a competent major league outfielder?)

Squawking Baseball discusses the incentives involved :

But there’s another dynamic that is in play here: as more and more players sign these deals, the supply of premium players on the free agent market will continue to drop. That, combined with the growing war chests many teams have already put together, will create excess demand for whatever talent ends up on the open market.

In fact, this has likely already happened in the past few years. Teams have a certain amount of money they can spend on payroll; as revenues rise and each win becomes more valuable, those budgets increase. With a limited supply of free agents, there will inevitably be high demand for some mediocre players (i.e. Carlos Silva).

The real question is this: at what point does the potential reward of becoming a free agent outweigh the risks of turning down $30+ million when you have nothing in the bank? If supply continues to dwindle, free agency may simply become too rational a choice to pass up.

I think that is the real question. This is just basic economics. The intersection of supply and demand fluctuates over time. In the early to middle portion of the next decade, we could see some very interesting outcomes in the baseball labor market. It appears we’re going to see flatter incomes across players, while the players on the high end of the extreme will be distinct solely for their salaries rather than their merits as on-the-field talent.

I assign no judgment to this, of course. Participants on both sides of the baseball labor market are experimenting with new ideas to meet their individual, subjective needs. Good for them. This refining is an outstanding attribute of any free market.

For me, the more interesting questions are how will fans react to this when the results are known rather than speculated, and how will teams react to this reaction? Looking at the Pat Burrell example mentioned above, there was significant praise for then-Phillies General Manager Ed Wade’s decision to sign Burrell for a cheap $50 million after his breakout season. Yet, hindsight has proven that an unfortunate burden on the team for years. (In his defense, Burrell has been spectacular for much of the last calendar year.) Phans have booed Burrell regularly, and the team has since been quite reluctant to invest money in players. Until Chase Utley’s recent long-term deal, the free agent signing of Jim Thome was the lone commitment longer than 3 years.

An apprehension to buy out arbitration and free agent years from Ryan Howard has become a prominent discussion for Phillies phans. His salary jumped from $900,000 last year to $10 million this year, through arbitration. No long-term deal appears likely, for multiple reasons. (Fear, greed, animosity – pick two) But this may not be a bad outcome. Only now does Howard show signs of emerging from his devastating slump to start the season. A player who will predictably inhibit the middle of a team’s lineup for the first quarter of every season is a huge risk. If the Phillies had Howard to a long-term contract in 2006, when he was in his MVP campaign, they would’ve acted before Howard fully revealed the player he would become. That does not necessarily disparage Howard, but it does reveal that teams won’t always have a complete understanding of a player’s developmental trajectory after one year.

Long-term, I suspect we’ll see this trend of locking up players early continue. But I think we’ll see more deals for third- and fourth-year players rather than second-year players. It’ll mean a bit more money to those players, but I suspect the team executives will figure out that the total money paid will change little. Individual commitments will reflect merit more than the current mixture of merit and potential. The NFL rookie salary structure demonstrates the risk involved in offering high rewards for potential rather than long-term performance. I doubt Major League teams will veer much closer to that, or stay as close as a few now appear to be heading.

Via Baseball Musings.

Post Script: I think the Chase Utley deal was the correct move, both then and now. He’s shown in-season consistency and a general improvement over several years. The core indicators for long-term success are there, shining as brightly as they could for any player in baseball.