Market Power

Musings by an academic economist on the power of markets and the power over markets.

Wednesday, December 08, 2004

The Baseball Player's Labor Market - Part Un

Major League Baseball’s labor market has three tiers: reserved players, arbitration eligibles, and free agents. Reserved players, those with less than 3 years of major league service, are bound to their teams by the reserve clause. If a reserved player’s contract expires, the club has the option of renewing the contract on the same terms for another year. The player’s only choice is to leave the league if the club picks up that option. All else equal, reserved player's salaries are held down.

Arbitration-eligible players have between 3 but less than 6 years of major league service. These players are also subject to the reserve clause. But if the player and his club can’t reach an agreement on the player’s salary, the player has the option of filing for arbitration. In arbitration, if a dispute cannot be avoided, then a supposedly neutral third party renders a binding decision.

Free agents are players who are not reserved: they can bargain with other teams once their contract is up.

What’s really interesting, IMHO, is that all three tiers are interrelated. Baseball’s Collective Bargaining Agreement lists 6 specific criteria that arbitrators are allowed to consider. One of those criteria is “comparable baseball salaries”, salaries of baseball players who are “comparable” to the player in question. This rule effectively brings the operation of the free agent market into the arbitration system, bumping up the salaries of arbitration-eligibles. As for the reserved players who are not eligible for arbitration, some may sign long-term agreements with their clubs to keep them under contract and effectively keep them from going through the arbitration process. But these long term contracts should bring the effects of the arbitration system back into the reserved player tier, bumping up their salaries as well.

The way that the threshold for free agency is set (6 years of service) is quite possibly the threshold that maximizes the salaries of all players collectively. Free agency is a good thing for the players' union. Or is it?