In Critique of a Salary Cap for Baseball
While it is true that labor’s share is presently below the 50% negotiated in the NBA’s CBA, baseball’s labor share has historically exceeded 50% from the mid 1990s-2000s. While their current low rate can be attributed to three successive pro-capital CBAs (covering 2007-2021), these losses could be reversed with a second successive pro-labor CBA negotiation at the end of the season, rather than entrenching a fixed share (potentially buoyed by Manfred’s likely aversion to lost games affecting his legacy in what is likely his last CBA negotiation). This also overlooks the issue of owners’ sketchy accounting practices that have concerned players in the past – teams that own media companies (like the Yankees) can divert on-field profits to the media ventures, shielding it from the potential future luxury tax calculations.
Aside from losing the potential for higher labor shares (like the general US economy has), a salary cap would also likely not be optimal for teams and fans. A cap would lock in fixed rather than floating distributional shares. While this is fine in times of excess growth, when lower-than-expected growth occurs, this would lead to unnecessary tightening (like the NBA actual saw this year, to a small degree). This would echo the unwanted downsides of a gold standard: flows of gold (i.e. league revenue) would determine the amount of economic activity (salary) available to circulate in the domestic economy (league). Lower-than-expected revenues would impose unnecessary anti-Keynesian austerity in any given year through forced deflation of salaries. This would also have the adverse effect of harming team long-term planning, as well as dilute the potency of consistent WAR-to-$ player valuations (a hallmark of measuring the marginal product of labor and increasing team efficiency).
A final argument against the luxury tax is that it could theoretically worsen competitive balance, the reason why so many fans purportedly support it. If teams like the Yankees and Dodgers, who consistently make revenues of over $500M were forced to spend less on salaries by implementing a salary cap, their owners would be freed to spend more on improving processes in talent identification and development (as they already have), while still having plenty of money left over for owner profits. Smaller-market owners would not have the same revenues and would likely want to ‘keep up with the Joneses,’ meaning extracting the same profit rates as the large-market owners, with player development likely taking the hit (as that is less publicized than salary figures, and less fought over by the union). And we know that the smaller-market teams like the Rays already have some of the lowest re-investment rates from revenue to following year salaries, so it is likely that this scenario would materialize. As the rich teams become comparatively better at identifying talent, they become better positioned to win, making more money, and worsening the cycle. Furthermore, luxury tax overages by large-market teams are what is currently used to compensate small-market teams, so by switching from a luxury tax t a salary cap, that would eliminate tax overages, meaning less redistribution, and worsening competitive balance.
I think a much better strategy would be steepening draft penalties for consecutive luxury tax overages, along with restrictions on deferred salaries. While it may be a popular gut-reaction solution, upon even cursory economic investigation, a luxury tax is an unserious strategy for the competitive balance ills the Dodgers have wreaked on the league in recent years.
If you are interested in these ideas, I suggest checking out my Baseball Economics course, or reaching out!
