Baseball's Rising Middle Class is a Myth

Major League Baseball is awash in cash. Revenues this season could reach $9 billion. New national television contracts and regional sports networks are providing more and more money to franchises, and baseball dominates ratings on those local networks. Attendance is high, and even small market clubs have the financial ability to lock up their stars to team-friendly $100 million deals.

Increased revenues throughout the game have created the illusion of a widening middle class in baseball. Outgoing commissioner Bud Selig has trumpeted the success of smaller market clubs like St. Louis and Pittsburgh, and the A.L. Wildcard game featuring Oakland and Kansas City was one of the most exciting in recent memory. This could be seen as the successful product of efforts by Selig and owners to equalize the playing field. Major changes limiting spending on the amateur draft and signing international prospects were designed to depress spending and theoretically allow smaller market teams to become more competitive.

But payrolls are just as far apart as they were a decade ago. The illusion of the rising baseball middle class is simply that—an illusion. And the recent changes instituted to the draft and the international market in the name of fairness have actually undercut the ability of small-market teams to compete against their big-money competitors.

There are four principal ways franchises acquire talent: free agency, trades between teams, the amateur draft, and signing international prospects. Free agency, both domestic and abroad, is expensive, and often dominated by teams in major markets. Investing money in the amateur draft and international signings are the two most cost-effective ways a budget-conscious team can bring in talent to help offset the lack of ability to spend big in the free agent market.

The amateur draft takes place every year in June. The draft already conferred a considerable negotiating advantage on teams before recent spending limits entered into the equation. A player can only negotiate with one team, and if he fails to reach an agreement, he must wait another year to be drafted (three years in the case of high school seniors), risking injury and ineffectiveness for the chance at a higher signing bonus. For small-market teams that cannot land elite talent through free-agency, the draft is the best way to land a future star at a reasonable price. However, even draft bonuses grew too high for some tastes. Teams became wary of the high bonuses draftees were demanding and sought to change the system when the players and owners negotiated a new collective bargaining agreement after the 2011 season.

Beginning in 2012, MLB switched to a slotted draft system. Every team is given a set amount of money to spend on their picks in the first ten rounds, potentially losing a first round pick in a subsequent draft if they go over the limits. This penalty has proved to be a deterrent as no team in the last three years has forfeited the following year's pick, but it has also resulted in teams being unable to sign draft picks because they could not exceed their limit.

In 2011, the last year without spending limits, the Pittsburgh Pirates, twenty-fifth out of 30 teams in terms of market size, had little difficulty signing current ace Gerrit Cole with an $8 million signing bonus. In 2012, with spending limits in place, the Pirates were unable to reach an agreement with their first round pick, Mark Appel. They failed to sign Appel not because they didn't have money to spend, but because they were unable to offer him more than $3.8 million without forfeiting a pick in the next season's draft.

Large-market teams like the Texas Rangers, Boston Red Sox, Chicago Cubs, and Philadelphia Phillies that performed poorly (some according to plan), will not only have an early pick in next year's draft, but because of the slotting system, they will also receive more money to spend than successful small market teams like the Pirates. Small market teams have difficulty entering bidding wars in free agency, but prior to amateur draft spending limits, they could spend a few million dollars here and there to obtain more amateur talent through the draft. The new rules diminish their ability to find cost effective talent.

Selig and the owners have also attempted to cut costs by instituting an international spending limit. Prior to spending limits, small market teams like the Minnesota Twins and Oakland A's had no issue outspending their large market peers on prospects from places like the Dominican Republic and Venezuela. The new limits have had an unintended consequence. Two of the richest teams, the Chicago Cubs and New York Yankees, have ignored their prescribed limit in an attempt to monopolize the market. Their financial might blunts potential consequences.

"All in all, we felt there was a little bit of a loophole we could run through and exploit. The chance to sign two of the top position players in this year's Draft plus a high-ranking pitcher plus a number of other interesting players made a lot of sense," said Cubs President Theo Epstein.

In 2013, the Cubs had no problem going over and above their approximately $4.5 million international spending cap. In 2014, the New York Yankees used their immense financial wherewithal to completely ignore spending limits. The Yankees' international cap was a bit over $2 million dollars and they spent close to $40 million dollars when the 100% tax on the amount over the cap is taken into account.

Small-market teams can compete to sign prospects on a player-by-player basis. However, it becomes very difficult to compete with a team looking to monopolize the market, signing multiple top prospects, and willing to pay a 100% tax and take on the penalty of not being able to spend more than $300,000 on any prospect the next two seasons.

Selig takes great pride in the belief that economic reforms have created competitive balance and the idea that all teams can compete on equal footing. The edge teams with a higher payroll wielded a decade ago has been dulled. After all, the Yankees and Red Sox are home for the winter. But correlation does not equal causation.

Competitive and economic parity are not equivalent. Salaries have gone up for all teams about 50% in the last decade (all salary information from USA Today database), but the notion of a rising middle class is unfounded. The share of total payroll for the top five biggest spenders is virtually unchanged from 2005 to today (28.4%, 28.1%). The share of payroll for the bottom twenty teams has similarly remained static over the last ten years (51.4%, 51.9%). Despite claims that as "payrolls move together, it is a sign of additional competitiveness" by New York Mets General Manager Sandy Alderson, and that "the landscape is getting a little flatter," by Epstein,, the salary structure between franchises has not changed significantly.

The spending limits on the draft and signing international prospects are in their infancy and will not have an immediate on-field impact. Massive revenues throughout baseball and the trend toward successful teams in small- and medium-sized markets like Tampa, St. Louis, Milwaukee, and Pittsburgh locking up their homegrown stars gives the impression of increased financial parity. Yet a gap still exists. It is just as big as it was a decade ago, and recent changes could result in a potential renaissance for the franchises that hope money can directly be converted to wins.