Wins, Losses, and Empty Seats: How Baseball Outlasted the Great Depression

3. Why Did Profits Collapse?: Player Salaries and Other Expenses

3. Why Did Profits Collapse? Player Salaries and Other Expenses Owners saw their profits plummet during the early years of the 1930s. It is certain that revenues fell in both nominal and real terms. Profits were sure to fall if owners did not reduce expenses commensurately . How quickly did owners adjust their player salaries and other expenses in response? Player Salaries Owners and fans have traditionally blamed player salaries for decreased profits and higher ticket prices. Owners were floundering in red ink by 1933. Did they use their monopsony power to reduce player salaries quickly? Player salaries were possibly the largest individual expense for owners during the 1930s, but today’s owners would envy them. According to information presented to Congress in 1951, player salaries, including managers’ and coaches’ salaries, comprised roughly a third of the total operating income or gross operating expenses in 1929, 1939, and 1943. The player salaries represented over 44 percent of total operating income and 36 percent of gross operating expenses in 1933, indicating a squeeze on the owners’ profit margins. After World War II, these ratios hovered around 20 percent but did not include managers’ and coaches’ salaries in most cases.1 As a comparison, modern owners provided a blue ribbon committee with payroll and revenue data 60 Financial Side of the Game for the 1995–99 seasons. This reliable information, which is rarely provided , showed that player salaries usually averaged more than 50 percent of revenues.2 For the owners, the years centered on 1933 proved to be the worst in terms of payroll-to-revenue ratios. No wonder owners sought to reduce payrolls between 1931 and 1935. Until the mid-1970s major and minor league baseball players labored until the reserve clause, which essentially bound them to one team unless an owner chose to allow a change. In his pathbreaking paper, Simon Rottenberg noted that under baseball’s reserve clause, owners possessed single-buyer (monopsony) power in setting player salaries, which “can have the effect of depressing salaries.”3 Because of the players’ weak bargaining position, there is a strong presumption that players were not paid commensurate with the additional revenue (in economic terms, the marginal revenue product) that they generated for a team. Salaries of baseball players are usually a matter of conjecture although , given the relatively small salaries of the era, the estimates were usually within a few thousand dollars of reality. Reporters’ estimates of Yankees player salaries were remarkably accurate, but their estimates of other teams’ player salaries were less accurate. The Haupert Hall of Fame Player Salary Database has American League player salaries which can be compared with newspaper reports. Sports economists would greatly appreciate having voluminous salary data, so they could decide whether owners paid players based on their productivity or whether the players were exploited and, if they were exploited, how severe that exploitation was. Were the Players Overpaid? Although owners were keen to cut salaries during the early 1930s, they had always seemed interested in reducing payrolls. The reserve clause gave the owners the upper hand during salary negotiations. Researchers Robert Burk and John Helyar have contributed just two of the more recent accounts of the unhappy history of labor and management re- 61 Why Did Profits Collapse? Player Salaries lations in baseball. The Congressional committee of 1951 also compiled a litany of player and management strife.4 Most observers argued that the reserve clause was necessary to promote honesty and competitive balance, but the chronic disparity between the Yankees and Browns undercuts the latter argument. One owner, Philip Wrigley of the Chicago Cubs, admitted that he admired a player who held out, since holdouts were confident of their abilities and wanted to be paid commensurately.5 A Sporting News editorial claimed that the average player benefited more from the reserve rule than did a star player, “who hardly needs protection, even if his club does, that the rule is favored and looked upon as a sort of a benevolent protection.”6 Despite the strong presumption held by economists that players were underpaid, sportswriters, possibly due to subconscious envy, appeared to believe that the players were overpaid. An editorial pointed out that “an advance is paid to the athlete of this type for a succeeding year and instead of playing better, he cannot play as well, and often plays abominably bad. Yet, we cannot recall that such a player ever volunteered to have...