Who Pays for Minor League Training Costs

LAWRENCE HADLEY [*] As an alternative to monopsonistic exploitation, the underpayment of players in major league baseball may be explained as the attempt by owners to recoup general training expenses. In this article, a method is proffered for estimating the "surplus" extracted from those players restricted by the reserve clause, where this surplus is defined as the difference between what the player is actually paid and what he would have received if he were a free agent. These estimates are then used to examine how the surplus varies across players. The results suggest a number of interesting aspects of the recovery of minor league training costs, monopsony exploitation, and the distribution of the surplus across players. First, owners only extract a surplus from "apprentices" (i.e., those young players who are ineligible for salary arbitration). Second, the largest surpluses are extracted from those who cost the least to train. In fact, the surplus generated by star apprentices is about twice that of mediocre apprentices. Fi nally, the results suggest that the surplus extracted from minority apprentices is 10-15% higher than that extracted from white apprentices. (JEL L83) I. INTRODUCTION Prior to 1976, major league baseball (MLB) players were perpetually bound to their team by a contractual stipulation known as the reserve clause. Rottenberg (1956) was one of the first to argue that profit-maximizing clubs would pay a player indentured by this clause a wage somewhere between his reservation wage and marginal revenue product (MRP). Owners, of course, preferred a wage as close as possible to the reservation wage in order to maximize monopsony rents. Anecdotal evidence of monopsonistic exploitation was provided by Davenport (1969), who showed that professional baseball revenues rose nearly 80-fold in the first half of this century while players' salaries rose just sevenfold. In one of the most cited works on this topic, Scully (1974) concluded that players were paid only about 20% of their MRP in 1968 and 1969. The free agent revolution of 1976 resulted in a collective bargaining agreement that binds a player by the reserve clause for just the first 6 years of his MLB career. Players in their first 3 years (here designated "apprentices") are bound to their teams with no recourse regarding their salaries. Players with between 3 and 6 years of MLB experience (here designated "journeymen") are also bound to their team by the reserve clause, but they are eligible to submit salary disputes to binding final-offer arbitration. Arbitration eligibility considerably strengthens the bargaining power of journeymen as evidenced by the large salary increments associated with eligibility (Chelius and Dworkin, 1980; Hadley and Gustafson, 1991; Zimbalist, 1992). Once a player accumulates 6 years of MLB experience (commonly referred to as a "free agent"), he can freely market his services to any interested team. Studies have shown that the salaries of free agents converge to their MRPs (Cassing and Douglas, 1980; Sommers and Quinton, 1982; Raimondo, 1983; Zimbalist, 1992). While market forces have greatly reduced the divergence between MRP and wages for those eligible for arbitration as well, studies indicate that apprentices remain underpaid (Burgess and Marberger, 1992; Zimbalist, 1992; Gustafson and Hadley, 1995). Chiefly ignored in these salary studies is the role of general training associated with a player's tenure in the minor leagues. The gap between an indentured player's MRP and the wages he receives is necessary to allow owners to recoup their costs of training young players. Krautmann and Oppenheimer (1996) addressed this issue by employing a multiperiod labor demand model of worker training. The evidence they presented suggests that the total surplus extracted from all young players may not be sufficient to repay owners for their investments in training. This article outlines a method for estimating the surplus extracted from those players restricted by the reserve clause. …