24 May 2010

Competitive Balance Prologue: Payroll Inequality in American Sport

One of my least favorite unending story lines is that of payroll disparity in Major League Baseball. It's not that there's no disparity, or that the disparity isn't significant, or that it isn't the greatest of the payroll disparities among the four major American leagues. All those things are definitely true. We should expect this, as the MLB has no hard salary cap.

The reason it's one of my least favorite topics is that it doesn't really matter, or at least not as much as the media, the rich (but not super rich) owners, and other uninformed or interested parties would have us believe.

I shall be arguing as much as I continue this series (which I shall roll out at a bit more deliberate pace than my Game Time report). To whet your appetite, here's some interesting data on the disparity in payrolls across time and the four major American leagues. The chart below plots the inequality of payroll distribution in the NFL, MLB, NBA and NHL from 2000-2010. Payroll data from USA Today (except for the NBA 2009-10 season).

To measure inequality, social scientists employ what is known as the Gini Coefficient. If you want to know more about the math behind this, click on the link (which takes you to the Wikipedia page). For now, suffice to say that the Gini Coefficient increases as inequality increases; a sample with a Gini Coefficient of 1.00 would be perfectly unequal, whereas a sample with a coefficient of 0.00 would be perfectly equal.

As you can see, the MLB has consistently maintained a greater disparity in payrolls than the NBA and NFL since the start of the previous decade, and the NHL since 2005. Far more interesting are the trends of salary disparities in the non-baseball leagues. Before the 2004-05 lockout season, the NHL was maintaining a level of payroll inequality similar to that of the MLB. Pro basketball has also seen payroll inequality wax and wane through time, while the NFL's distribution of salaries remains rather stable.

Rather obvious here are the effects of different collective bargaining agreements (CBAs) on salary distribution. To make them clearer I built the following chart with different shades for seasons operating under different CBAs.
2000 0.22 0.04
2001 0.21 0.10 0.09 0.21
2002 0.20 0.10 0.12 0.22
2003 0.21 0.06 0.13 0.20
2004 0.24 0.07 0.15 x
2005 0.23 0.07 0.12 0.10
2006 0.21 0.07 0.09 0.06
2007 0.22 0.05 0.09 0.09
2008 0.23 0.08 0.08 0.09
2009 0.20 0.08 0.07 0.09
2010 0.22

The NFL has operated under (more or less) the same collective bargaining agreement since the NFLPA was reinstated in the early 1990's. The very restrictive salary regime in Football has kept salary inequality to a minimum. In the NBA, inequality in payroll distribution was rising until the league and players agreed to a new system in 2005, after which the distribution evened out. The NHL offers the harshest contrast of all four leagues: after the lockout, NHL payroll disparity dropped from MLB levels to those on par with the NFL and NBA.

On the other hand, Baseball has operated under three separate CBA's, not one of which contained a hard salary cap. As a result, there's no significant difference in payroll disparities between the three different MLB CBA eras.

One can make the argument that the MLB's regime actually exacerbates payroll inequality. While mid-level teams can't afford to pay the "luxury tax" for multiple seasons in a row, the richest teams (specifically the Yankees) aren't significantly dissuaded from doing so. Moreover, the absence of a salary floor fails to disincentivize the hoarding of revenue sharing capital.

The chart above reinforces my analysis of the MLB's salary regime. Payroll data for the other leagues prior to 2000 is dear, but the data from the MLB indicates an increase in payroll disparity following the 1994 strike and the ensuing 1995 CBA. This disparity peaked in 1999, but has trended in a narrow window between 0.20 and 0.25 despite the imposition of a "luxury tax" in 2003. If there were any parties to the 2003 CBA who expected the luxury tax to improve payroll balance, by now they should be thoroughly disillusioned.

In the coming weeks, I will delve more deeply into the economic disparities visible across and within the major sports leagues, questioning whether these inequalities are pernicious as they pertain to competitive balance. Full disclosure: I'm a pro-labor Yankees fan, so you can probably guess where my opinions lie. That said, I shall do my best to present my findings without bias.



    I 100% agree!!

    ~Kristi Dosh

  2. Hey, thanks Kristi! Was just reading your work over at Forbes.com. Great stuff.

  3. Good stuff, Jess. Can't wait to read the next one.

  4. MLB economic system is a horror show. Tell me the last time the Orioles, Jays or Royals sniffed a pennant race. The Yankees play about 60 games a year against nearly AAA level teams. They practically have their playoff spot locked up already. Once in a while, a small market team gets lucky with a young player (i.e. Longoria) and can temporarily escape the stench of non-competitiveness. Typically, this will last a couple of years, until the player reaches UFA. The luxury tax was a life line to create revenue so the small market teams can stay in business. There are very few teams that can compete year in and year out with a 220MM payroll out of the Bronx. Their economic system has turned the sport into a snooze fest. Just look at how exciting and how there are always new teams competing in the NFL. Too bad their elite players want a copy of the MLB system in football. In the five years since hockey switched away from a baseball-like economic system, what were the results- two first time cup winners, an end to the 50 year drought in another city, and a 20 year drought in another.

  5. Anonymous: There's more playoff turnover per playoff spot in the MLB than there is in the NFL.

    And you know why the Orioles, Jays or Royals haven't sniffed a pennant race? Because they don't have to play well to make money under the MLB Revenue Sharing system. Look it up: losing teams are just as profitable as winning teams in MLB.

    Does that mean MLB doesn't have a perception problem with competitive balance? Of course not. You're not going to have random winners in the MLB like you do in the NFL when you have a 162 game season and 8 playoff teams instead of a 16 game season with 12 playoff teams.

    This has nothing to do with income or payroll, of course. This has to do with the structure of the leagues.

    It's great that you have an opinion, but here at RPBlog we're really only interested in facts.

  6. @Anonymous: I wrote a lengthier response before but an error wiped the message out. J-Doug has since responded with sme of my points. I will just point this out, the same thing happens in the NFL. Cleveland, Cincinnati, Buffalo, San Francisco all have long playoff droughts for the same reason they exist with baseball teams and its not purely economic reasons. If you don't draft well and make smart roster decisions then you will struggle. Regardless of league.


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