In case you were wondering why I haven’t written in the last few weeks, the blame is to be placed on the following video, which led me to look up virtually every number having to do with the business of baseball and then dive head first into Excel and not come up for air:
Hee. In other exciting news, I’ve started writing for Technorati, so you will see some posts here link over to my writing on that site. For example, click here for the first article in my series of analyses on the history of baseball payrolls and the effect of spending on competitive success. There are all sorts of fun graphs and charts, including the following monster of an infographic:
You know you’re curious now…I will post the full text here eventually, but I told the nice Technorati people that I would let the article be exclusive there for a bit. Enjoy!
Update: Here’s the full text of the article:
A few days ago, I came across a parody of a MasterCard commercial with the tag line “There are some things money can’t buy … the World Series isn’t one of them.”
Now, I like baseball as much as the next person (probably more so, actually), but I am more of an economist than specifically a sports person, so I am most intrigued by the dollars and cents behind the business of baseball. (In fact, as I was going through the data referenced below, my best friend commented “You’re busy sucking all of the fun out of the nation’s pastime, aren’t you …” Excuse me if some people thing that math *is* fun. Sheesh.) As such, the video prompted a few general questions in my mind:
1. What has happened to the size of team payrolls over time? In other words, have players (and by extension World Series titles) gotten more expensive?
2. Does money buy happiness, or World Series titles at least?
3. Why do some teams spend so much more than others? “Should” they spend so much (or so little)?
I will attempt to shed some light on the first question here, and I will address the other questions in an ongoing series of posts.
I assume that there has been a lot written about baseball payrolls (I’m too lazy to actually do my homework on the matter), since there are a lot of numbers-oriented baseball fans out there. (One visit to the Society for American Baseball Research web site will confirm this). But, despite the fact that Michael Porter is a Senior Advisor on Strategic Planning for the Boston Red Sox, economists in general haven’t lent their analytical skills en masse to the baseball industry just yet. That said, we have a lot to offer in terms of our ability to tease out causal relationships and such, so bear with me here.
To analyze the above issues, I pulled team payroll data from Baseball-Reference.com, which has the numbers for 1985-2009. Twenty-five years is not quite ideal, but it’s at least a good starting point to see patterns. I also took the liberty of adjusting all of the payroll numbers to take inflation into account (I told you I am a nerd), so all of the numbers reported are comparable to 2009 dollars. I’ll start with some basics regarding the evolution of team payrolls:
Average Annual Growth Rate: 6.4% Overall, 6.8% for AL, 5.9% for NL
(Throughout the graphs, AL refers to American League and NL refers to National League).
If you look at the raw numbers, it’s pretty clear that payrolls have been increasing over time, but I wanted to make sure that the increase wasn’t solely due to inflation. According to the above, it isn’t. Why did players get more expensive? Economically speaking, players get more expensive when either the supply of players decreases or the demand for players increases. As far as I know, good baseball players aren’t getting more scarce- it’s not like parents are now pushing the talented kids into soccer, football, ballet, etc., rather than baseball. If anything, the supply of players is increasing due to the increased influx of players from other countries. This leaves us with the demand explanation. To help test this theory, consider the historical revenue for MLB teams (also adjusted for inflation):
Average Annual Growth Rate: 4.5% Overall, 4.6% for AL, 4.4% for NL
(This data comes from the Business of Baseball section of the SABR web site).
Since income is an important determinant of demand (and because baseball players are presumably a normal good), this data suggests that players got more expensive because teams have gotten more money with which to compete for players (You can ask A-Rod and Manny Ramirez for confirmation on this point, for example).
Technically, it’s also possible that either the increased payrolls caused the increased revenue or that some outside force caused both the increase in revenue and the increase in payroll. The former explanation doesn’t seem very likely- why would people be more willing to pay to see a baseball game just because the players are getting paid more? (It’s not like the additional pay actually makes the players better, at least not in the short term). The latter explanation is plausible, but it’s basically a variation on the original theory that the increased salaries are the result of a bidding war for players.
One notable feature of the payroll graph is that the American League seems to be pulling away from the National League in terms of spending. Given what I know about the fiscal strategies of the New York Yankees (read, they spend a LOT of money on players), I decided to look at what payrolls would look like in a Yankee-free world. (Don’t get too excited, Red Sox Fans …)
In general, the payrolls for the American League and the National League are pretty much in line on average over time. I now find it more perplexing than ever that the National League won only 9 World Series titles and 5 All-Star games during this 25 year period. Is the American League really getting more for its money?
Not necessarily. The key feature of both the All-Star game and the World Series is that they involve the best players or teams from each league rather than the league averages. Therefore, if we think that money buys better players and thus more success (I will try to test this later), we care about how spread out the payrolls are among teams in addition to what average payroll is. Statistically, this measure of “spread out” is called standard deviation, and standard deviation measures how far a team’s payroll is, on average, from the average payroll. (Okay, that was confusing. Let it suffice to say that bigger numbers mean more spread out).
Average Annual Growth Rate: 1.9% Overall, 1.2% for AL, 3.1% for NL
We see here that, even when we account for the fact that payrolls are increasing over time, there is more variation in team payrolls than there has been in the past. Furthermore, there is more deviation from average in the American League than in the National League. This implies that the top spenders in the American League outspend the top spenders in the National League. If we look at the rank of payrolls for the American League versus the National League over time, we find this to generally be the case. (Click the graphic for a larger image).
This handy infographic tells us a lot of things, and I will refer back to it in future analyses. For now, I’ll summarize some payroll points:
- Baseball payrolls, on average, have been growing faster than inflation over the period 1985-2009. American League teams tend to spend more than National League teams.
- These payroll increases are correlated with an increase in revenue for baseball teams over roughly the same period.
- Baseball payrolls are also getting more spread out over time, and American League payrolls are more spread out than National League payrolls. This leads to more outliers in terms of salary for the American League.
Next time, I will explore what effect the increased payroll has on win percentage and playoff performance for teams.