THE EFFECTS OF FREE AGENCY ON WAGE EFFICIENCY AND TALENT DISTRIBUTION IN MAJOR LEAGUE BASEBALL

Abstract

The strikedown of the Reserve Clause in Major League Baseball, also referred to as the institution of free agency, has reconfigured the baseball player labor market. Player wages have since skyrocketed, indicating changes in wage efficiency and talent distribution. This paper attempts to locate and understand any such changes as a direct result of free agents entering the Major League Baseball labor market. Wage efficiency is discussed by group (non-free agents and free agents) and is studied both before and after the implementation of free agency. It is determined by comparing actual wages to marginal revenue products of labor using team win percentage as the firm output. Non-free agents are found to be underpaid relative to their value, and free agents are generally found to be overpaid. These results imply a complex bilateral monopoly labor market where team monopsony power is strongest against non-free agents and monopolistic free agents successfully push wages upwards. Changes in talent distribution are studied by comparing trades under the Reserve Clause to free agent migration trends. Free agents tend to relocate to large market teams; however, acquiring free agents does not greatly increase team winning percentage. This indicates that League competitiveness is not significantly harmed by free agency. Research suggests a restructuring of free agency eligibility criteria such that players become free agents sooner in their careers would mitigate inefficient outcomes by increasing labor supply and reducing player monopoly power.