Eric Gartman / Salaries & Business

THE 2002 LABOR DEAL

December 27, 2002

by Eric Gartman

Earlier this year I wrote an article on baseball's economic imbalance, with several suggestions on remedying this problem. On August 30, the players' union and the owners reached an eleventh-hour agreement that narrowly averted a strike. How will the new deal affect baseball's imbalance?

The deal was made possible by concessions from both sides. The owners agreed not to pursue the elimination of any franchises, while the players agreed to random drug testing. Most important were the two financial agreements. Revenue sharing of local income will increase from 20 percent to 34 percent, an annual net change from $169 million to about $258 million annually going from rich to poor. Furthermore, a luxury tax will be instituted on teams whose payroll is over $117 million. The tax will be 17.5 percent of the money over the threshold, with the threshold increasing every year in order to allow players' salaries to grow, but with the tax also increased in order to dissuade teams from breaking the limit.

Theoretically, the deal could have a major impact on baseball's competitiveness. The poorer teams will now have more money to work with, while the wealthy teams will not only have less money, but a major incentive not to break the luxury tax threshold. I don't think the amount of revenue-sharing is quite enough. I would have preferred a figure of about 50 percent to the 34 percent agreed on, but at the very least, it will bridge some of the gap between the have and have-nots.

This off-season is the first with the new agreement, and the first real test to see how the deal has affected baseball's imbalance. At first glance there seems to be a major change in the way baseball does business. Fewer blockbuster deals have been signed, but there are also fewer superstar free agents this year than there have been in the past. More importantly, several of baseball's elite teams have publicly stated that they are trying to stay below the luxury tax threshold, and have moderated their free-spending ways. Atlanta traded Kevin Millwood instead of keeping him and risking arbitration, where he would likely earn $10 million. Los Angeles has only made one signing, small contract for the 38 year-old Fred McGriff, while stating their goal of staying under the threshold. Ditto for the Red Sox. The New York Mets, another traditional big spender, have made some major acquisitions, but are still below the threshold.

That leaves only one of the elite teams left: The New York Yankees themselves. The Yanks were the only team to reject the labor deal, saying it was aimed against them in particular. Since saying that, they have shown absolutely no signs of even acknowledging the deal's existence. The Yanks have made several major signings, including Japanese star Hideki Matsui (Godzilla), and Cuban defector Jose Contreras. The Yankees payroll now stands at $140 million. Yankees GM Brian Cashman has tried to reduce payroll by unloading Rondell White, Raul Mondesi, and Sterling Hitchcock, but so far, there have been no takers. How then, can the Yankees afford such a high payroll as well as the luxury tax? Well, quite simply, the Yankees have so much more money than any other team that they can afford the extra fines easily. It has been estimated that the Yankees could have a $200 million dollar payroll if they wanted, and still be profitable!

We thus see a contradiction thus far in the off-season. All the elite teams, save the Yankees, have had to moderate their spending, making the game more competitive. But the Yankees have actually increased the gap between them and the rest of the field, partially as a result of the new tax, which the other teams can't afford. It seems that when one team is so much more lucrative than any other, even well-thought out attempts to balance the field may not work.

Furthermore, the small-markets teams have been conspicuously absent from any major signings. Even with the extra money, they have been either unable or unwilling to sign big names. It remains to be seen how they will use the new money. Thus far, the new labor deal has been a mixed bag. It has moderated the behavior of some of the elite teams, but with one major exception, where the deal worsened the gap. Also, so far there is no sign that the deal was big enough to help the smaller teams. Of course, it's still too early to make the final judgment about the new labor deal. But some patterns and trends may be discerned even now.