Winners and Losers: Income Inequality and Its Effects on Outcomes in Major League Baseball

Baseball fans are cheering today as the 2014 World Series gets underway in Kansas City. But beyond the balls and strikes, hot dogs and peanuts, the sport has also stirred up a following among labor economists who are interested in the relationship between player pay and team performance.

In “Wage Dispersion and Team Performance: A Theoretical Model and Evidence from Baseball,” William Breunig and a team of Australian and French economists find that wage inequality has a significant negative relationship to a baseball team’s winning percentage, regardless of average team salary.

Wage disparities have been increasing in baseball but they aren’t unique to baseball teams. Across the U.S. economy as a whole, inequality in wages has been growing even as the median wage remains constant. How widening wage gaps affect the productivity of workers and the economy overall is a salient public policy question.

To analyze income inequality and its effects on baseball teams, Breunig et al. rely on 25 years of player pay and team performance data from U.S.-based Major League Baseball. This includes roughly one million salary levels between 1985 and 2010 as players participated in nearly 59,000 games, on one of 30 major league teams.

Breunig et al.’s first finding is consistent with reports that superstar salaries in baseball have increased markedly over time, compared with more consistent minimum and average player salaries. While the annual minimum salary has hovered just under $500,000, the top earner in recent years has made over $32 million. But how do baseball teams’ wins and losses correlate with the level of income inequality within each team?

On a game-by-game basis, Breunig et al. find a significant negative correlation between income inequality and a team’s tendency to win. The authors’ model, based on wage inequality, correctly predicts the outcome of games in 55.56 percent of cases, based on the wage disparities of the two teams playing, after taking into account such elements as home field advantage. In fact, in terms of magnitude, the authors’ results suggest the effect of wage disparity is on par with home field advantage: home teams win 54.11 percent of the time.

Despite the breadth of the data from 25 years of baseball records, the researchers acknowledge that it is inherently difficult to distinguish effort, which might be affected by external factors that make a player more or less motivated, from ability, which is internal to a player. This makes it difficult to conclude why wage inequality is negatively affecting team performance. This study did not attempt to distinguish which mechanism is at play in baseball or in other types of workplaces or communities where wage disparities could affect team dynamics.

Then again, maybe winning isn’t everything, at least not the way we’ve defined it. As the researchers acknowledge, baseball teams are businesses, and as businesses, they may primarily want to maximize profits. A superstar player with a salary to match may be expected to drive fan attendance and merchandise sales, rather than drive in runs. Even if the star isn’t helping his team win on the field, he might be hitting revenues out of the park.

Article Source: Robert Breunig, Bronwyn Garrett-Rumba, Mathieu Jardin & Yvon Rocaboy (2014), Wage dispersion and team performance: a theoretical model and evidence from baseball, Applied Economics, 46:3, 271-281, DOI: 10.1080/00036846.2013.839864

Feature Photo: cc/(Dave Curtin)