The Salary Cap in Sports: Part 1 (Baseball)

I think it would be efficient (haha) to introduce myself as a new writer for Sound Economics at the beginning of my blog post. My name is Lukie Crowley, a sophomore economics major and I am thrilled to start writing for Sound Economics.

My first post will be part one of a three part series about the salary cap in baseball, football and basketball. I will be discussing about how it differs in each sport and the incentive to change it or stay stagnant in said sports.

In the rare major sport that does not have a salary cap (while also guaranteeing all of the money), baseball has received criticism for not implementing one, as teams with big revenues can spend mercilessly without receiving a true penalty. The luxury tax is the only limit baseball has to encounter. The tax has been set at $189 million from 2014-2016 and the team will be charged at a 17.5% tax rate if they are over it, with the rate increasing steadily each time they surpass it. However, the tax is only reached by a few teams and they have already spent an absurd amount to reach that point. The Los Angeles Dodgers ended their 2015 season at nearly $291 million for their 40-man roster, so they were past the point where they cared about the luxury tax. It just shows that unbelievable amount of revenue some of the bigger market teams have, being able to handle a payroll like that and the tax added on top of that.

There is plenty room for error as an executive when building a team in Major League Baseball, as they can possess multiple inadequate contracts on their roster and still compete at a high level. Take the Boston Red Sox, for example. In the winter of 2014, they handed out a 5-year/$95m contract to third baseman Pablo Sandoval, a 4-year/$88m contract to infielder Hanley Ramirez, traded for pitcher Rick Porcello and gave him an extension of 5-year/$82.5m. The Red Sox struggled mightily and found themselves in last place in their division.

This is not the success story that I was just referencing above, but it does not matter. Since there is not a salary cap in baseball, the Red Sox can continue to pile up contracts on their roster. Some of the lower revenue teams are not capable of doing that, but many teams including the Red Sox have the flexibility to add such contracts in such a highly populated area rich in baseball history. That is exactly what they did in the winter of 2015.

After handing out the contracts noted above, they gave pitcher David Price a contract of 7-year/$217m without any restriction from a salary cap. The Red Sox are now poised to succeed in the 2016 season and hold the four contracts above on top of the other 21 players on the roster. Why are teams allowed to do this? Couldn’t this money be going somewhere else?

To answer the first question, the salary cap is implemented to introduce competitive balance into whatever sport. Baseball does not have the aforementioned salary cap because, over the course of their history, they have had relative balance when comparing the amount of teams that have won championships against other sports. Gwen Knapp from the San Francisco Chronicle has a great table from 2011 here (you can add in the Seahawks as champions). Moreover, they have systems in place where teams that do poorly in a season receive draft picks. In addition to that, the MLB receives a lot of support from the high-revenue teams owners and implementing that salary cap could cause discourse between the teams and owners. Finally, if the teams were to have the salary cap, the amount of star players on every team might be reduced and for teams like the Boston Red Sox, New York Yankees and Los Angeles Dodgers that depend on having a lot of star power could suffer mightily in popularity. This could hurt the sport even more that has been struggling against the argument of it being too slow for the modern-aged children.

In response to the second question, if the salary cap were to be introduced to the MLB, the money would not magically disappear. This is limiting the players’ salaries, not the executives and owners. In fact, the percentage of money that was higher than the salary cap would go directly to the owners and they would just have a higher salary themselves. The revenue would not stop either, so their pockets would grow and grow. The union for the players would not accept that after a period of so long that omitted a salary cap. If the league were ever to try to implement it, they would face a lengthy battle. To conclude, I do not see a salary cap being implemented in Major League Baseball any time soon because of the already seen competitive balance systems, possible popularity loss, and the thought that the owners would gain more profit.