The average salary in Major League Baseball has risen to $2.87 million, up 9 percent from 2005. The median salary has also increased from $800,000 to $1 million; topping the previous high of $975,000 in 2001. The number of players making at least $1 million increased from 390 to 409.
The increase of all these three numbers shows that not only are gross salaries rising, but they are also being distributed more equally than before.
Salary increases were an objective of the last collective bargaining agreement between the owners and players - an agreement that looks to be achieving its goal. The agreement focuses on two main changes: revenue sharing and a soft salary cap, enforced through a luxury tax. Both of these devices aim to bring a competitive balance back to baseball by taxing the rich and giving to the poor.
With 11 of the bottom 15 teams increasing their payrolls, and those at the top reducing their spending (yes, even the Yankees), baseball will see increased competitive balance in the future.
Major League Baseball will still be far from a perfect balance, but such idealism should not be the goal anyway. Teams with rabid fans who sell out every game should not have to write a fat revenue-sharing check to the Floridas and Tampa Bays of the world every year while these teams have no restrictions as to how to spend the money they receive.
This accountability issue should be the main point during the labor negotiations this year, as the current labor agreement expires in December. Bob DuPuy, the chief operating officer of Major League Baseball, explained to the Associated Press, "There are still concerns at both the top and the bottom. The goal would be to get a tighter range [of salaries] that would ensure that even more than 20 clubs at Labor Day still have a chance to compete for playoff spots [and] that playoff spots are based on skill, talent, and blossoming stars and not just on plugging holes with economics."
How significant is salary in determining how good a baseball team is? To estimate this, I combined the projected wins for each team in 2006 and their payrolls. Projected wins were determined using the projected 2006 standings of Baseball Prospectus, Diamond Mind and the analysts at ESPN.
Baseball Prospectus and Diamond Mind are sabermetric number lovers, and their projection values start by summing the projections of each player. The teams are then run through millions of computer simulations to predict how many games each team will win in 2006.
Baseball Prospectus' team win projections have an error bar of +/- 9.5 wins, despite their relatively short history in baseball evaluation.
The ESPN standings are the average of the predictions of their 16 baseball analysts.
These analysts range from Peter Gammons to Rob Neyer to Harold Reynolds, and represent a less scientific approach to forecasting. Such opinions are valued nevertheless.
By combining the average projected wins and salary, we can see how much salary influences wins and which teams are most efficient.
According to the regression equation, if a team increases salary by one percent, the number of games the team wins should increase by 12.279 on average, all else held equal.
The logarithmic trend line in the graph displays the diminishing returns to salary; wins increase as salary increases, but at a decreasing rate. The R=.4889, signifying that 48.9 percent of the volatility is in wins, is explained by salary - a relatively hefty number for one variable.
This analysis clearly demonstrates why Major League Baseball wants a competitive balance: Wins can be generated in a systematic way by increasing payroll.
