MLB Proposal: COVID-19 Risk and Wage Differentials
Major League Baseball and the Players Association are negotiating to play the 2020 season. The latest proposal is a 76 game season with 75 of a percent prorated salary, or in other words, 35 percent of their initial salary (76/162*0.75). Jeff Passan of ESPN reported that the proposal is 50 percent of prorated salaries and if the postseason is completed, the players will get 75 percent of their prorated salaries. In addition, there will be no draft pick compensation tied to players who are free agents at years end. That will potentially help Mookie Betts in free agency, but given that the owners have shown reluctancy to spend in free agency and the decrease in revenue from COVID-19, the marginal value of that loss in draft pick could potentially not change his market much. The big Gerrit Cole, Anthony Rendon, Bryce Harper deals won’t be there with or without that draft pick tied to him, continuing the trend of teams using less of their revenue on payroll.
Why will players reject the offer? It’s pretty simple, they want 100 percent of their prorated pay given that is what they agreed upon in March. Given the risk of playing, traveling more, interacting on the field, interacting with other members of the organization, etc. puts players more at risk of catching the virus. This can put their families at risk, their long term salary at risk (is it worth it to play for 35 percent of salary if you’re Mookie Betts?), and other components. The owners want to subsidize the losses to the players.
From an economics perspective, we can look at compensating wage differentials. In compensating wage differentials looks at the wage and how risky a job is. Individuals in the labor market maximize their utility as a function if u(w, a) where u = utility, w = wage, and a = amenities (i.e. the benefits of the job), where there is some tradeoff between w and a. For our purposes, we can really just look at w since the amenities have not changed and in one instance, where games would be held at spring training sites and players away from their families, amenities would have decreased. We will look at w. The MLB teams and their owners will be the firms who have a level of labor demand, 26 active roster and 40 man roster, and the players will be the labor supply. However, the MLB players are not the only labor supply, as college players who will be drafted or signed as undrafted free agents, minor league players, and independent league players are part of the supply as well.
Other terms that are need are Δw = w(risky)-w(safe), this is the wage differential. W(risky) is the wage needed in a job that is riskier (playing during the COVID-19 outbreak) and w(safe) is the wage needed in a safer job (a normal MLB season). Δw(res) is the minimum wage differential that the firm needs to provide to get one additional worker, where w(res) is the reservation wage, or the lowest wage needed for an individual to enter the labor market. E* is the equilibrium of jobs. There are three different scenarios.
Scenario One: If Δw > 0, there is a positive wage differential. This fills E* risky jobs, where the rosters will be filled. In this scenario, the MLB teams will either be giving more money or more amenities to players. Since neither is happening, or would happen as players won’t get a raise, then this scenario is unlikely to occur. If MLB teams offered to pay players more, there would be baseball. But this is unrealistic and we can deduce that scenario one won’t happen.
Scenario Two: Δw = 0, where there is no wage differential. This would mean that there are enough players willing to play in the MLB season where COVID-19 is a risk and no wage differential needs to be played. Given that the MLBPA wants 100 percent of prorated pay, this seems to be the most likely scenario. The prorated pay is what players would be earning over the course of those games and is what players want. For there to be baseball, no wage differential is needed, players just need their prorated salaries.
Scenario Three: Δw < 0, there is a negative wage differential. In this scenario, labor supply exceeds labor demand and there would be baseball as enough players would be willing to play. If there is a strike, or players hold out, teams could look to the college players, minor leaguers, and independent league players. These players however would then be banned by the MLBPA and would not receive any union benefits. There is potential for this to occur, but it is unlikely. From just the MLB player labor supply side, we know that players won’t play for less than 100% of their prorated salary. They will not take a wage cut to play, and if the MLB and MLBPA did agree to that, we know Blake Snell, and we can assume others, would not play.
Scenario one is not reasonable as pay or amenities will not increase for the 2020 season. Scenario three is not reasonable as players continue to want 100 percent of their prorated salaries and will not pay for less. There is not enough labor supply to meet the demand level, and thus no baseball. Scenario two is the most likely. MLB teams do not have to offer a wage differential. Players will play for their full prorated salary and won’t play otherwise, suggesting that no wage differential exists and scenario two is what is happening in these negotiations. For there to be baseball, the owners will have to pay the full prorated salary or increase amenities at a much higher rate, and given the probability of the latter, the only guarantee of a MLB season is full prorated pay.