Originally written on Fangraphs  |  Last updated 6/5/13

The Major League Baseball Rule 4 Draft begins this week. The modern draft was instituted in 1987, but a filtration system for entry-level talent existed before World War II. Today, the draft exists for two purposes — competitive balance and wage suppression, with the former being publicly cited as the reason for its existence but the latter being more of the actual motivation for the league. Let’s put aside the wage suppression issue for a minute, though — noting that nearly every corporation in America is essentially in the business of minimizing their labor costs — and focus on the competitive balance aspect of the draft. To many, competitive balance is essential to their enjoyment of Major League Baseball. The satisfaction of these observers — fans — is directly related to the profitability of Major League Baseball. In other words, so long as fans are emotionally and economically invested in the sport, Major League Baseball will continue to profit. The draft and revenue sharing are the two mechanisms in place to foster balance. Of course, Major League Baseball is the sole major American sports league without a salary cap. If the league removed the draft, some fear balance would erode and the American pastime would resemble the English Premier League. Whether said realization would have negative consequences is a contentious and interesting question for another day. For now, let’s assume that competitive balance is crucial to the league’s success. Major League Baseball employs two distinct balancing techniques, the draft and revenue sharing, with distinct features. Wendy Thurm detailed the league’s revenue sharing procedure this winter after the Marlins’ firesale. The post is nothing short of a “must read” for collective bargaining nerds. Thurm writes: “All 30 clubs contribute 34% of their Net Local Revenue to the base plan pool. The base plan pool is then distributed equally to the 30 clubs….[Then there is a supplemental plan.] The goal of the supplemental plan is to raise the overall percentage of revenue shared…from 34% (in the base plan) to 48%. But each [c]lub contributes a different amount to the supplemental plan, based on something a Performance Factor…” Again, it’s a must read and Thurm explains other revenue sharing quirks that benefit small-market teams too. Remove all of the technical complexities and revenue sharing is a simple concept. Major League Baseball facilitates the transfer of profits from large-market to small-market organizations. Surely, a win for competitive balance — if the funds are reinvested. Conversely, the draft structures entry-level talent procurement to benefit poorly preforming organizations, regardless of clubs’ finances. Should you be unaware of the new procedures, Thurm detailed them in a two part series over the last week. Neither mechanism is without consequences. Revenue sharing contradicts America’s lust for capitalism. Why should the New York Yankees fund the Kansas City Royals’ operations? Typically, it would be offensive if one’s direct competitor asked for payroll funds. Of course, that assumes the big-market organizations and their ownership have earned their advantage over the competition. However, that is hardly the case. Major League Baseball and its owners have been gifted an anti-trust exemption and publicly financed stadiums by federal and state public officials. The former has an interesting history which can be attributed to Congressional inaction and judicial restraint. My favorite smirk inducing quote comes from Judge Cooper, who states, “The game is on higher ground; it behooves every one to keep it there.” Well, not everyone. Due in large part to the anti-trust exemption and publicly financed stadiums Major League Baseball’s franchises operate within a unique goldmine. Ownership profits — so much so that revenue sharing is accepted — while Major League talent shares in those profits and fans get a superb product. Somehow the consequences of the draft are overlooked or even dismissed. The draft serves competitive balancing purposes, but draftees suffer in the process. Draftees’ lack of rights are due to their lack of representation. Major League Baseball collectively bargains with the Players’ Association, of which draftees are not members. Without their interests being represented at the table, their interests are freely bargained away. Ownership can cloak their adulation for the draft as a desire for increased balance, but their intent — or at least a major effect — is wage and movement suppression. The draft forces individuals to contract with specific teams  if they are to enter the league. The Players’ Association has a duty to its membership, not its potential future members. If the Association believes there is a chance salaries could increase due to strict rules regarding amateur spending, they will not resist. And they haven’t. Many seem not to care that an intended consequence of the Collective Bargain Agreement is to suppress wages and prohibit movement of an unrepresented third party. The draft is deemed appropriate because it promotes competitive balance. When discussing this topic in the past I’ve used the following analogy to put the consequences of the draft in perspective. Imagine you have just graduated with your masters in accounting. You’re brilliant and have many desirable qualities. Instead of having the option to negotiate with any of the “Big Four” or other quality firms you are drafted by KPMG. KPMG tells you should you sign with them you will work in their Torabaz Khan Road office in Afghanistan. KPMG owns rights to your accounting career and if you want to have a career in accounting you need accept their offer, set at a heavily discounted rate by the industry. While considering their offer, KPMG informs you that you will remain in Afganistan or wherever they may assign you until you have proven yourself. The chance of proving yourself is small, maybe 25%. But, should you succeed you will be brought to New York to continue your career. Then, after working for several years at a discount, you will be eligible to negotiate with their competitors. Hopefully you are still useful. For any other career a draft would be outrageous. When it comes to athletes few seem to care. Removing draft eligible high school and college athletes from the open market greatly suppresses their earning potential and forces them to work and live for a specific team without choice. Today, the new pool system and its draconian penalties limit both parties from negotiating freely, decreasing draftees’ signing bonuses even further. In baseball, more than any other sport, one’s first contract is greatly important because they may never get another contract. Even top prospects have an extremely high failure rate. For the majority of this season’s amateur draft class, their value will never be higher than it is on June 6th. Years later, the prospects who develop into Major Leaguers still feel the effects of the draft due to today’s extensions craze. The suppressed signing bonuses and minimal wages minor leaguers earn increase their teams’ leverage when negotiating extensions. It’s impossible to say whether Evan Longoria or Chris Sale would have signed their extensions had they earned their fair market value when they entered the league, but it’s undeniable they would have had significantly more leverage when negotiating terms if they had more money in their pockets. No one is crying for Longoria or Sale, but they were lucky. Consider the story of Matt Purke. According to Nolan Ryan, Purke had a pre-draft deal with the Texas Rangers for $6 million in 2009. However, Major League Baseball terminated the arraignment after they assumed an oversight role of the Rangers’ non-budged transactions. Unable to cash in after an inspired freshman year at Texas Christian University, Purke reentered the draft in 2011 after a shoulder injury. He was selected by the Washington Nationals in the third round and signed a 4-year/$4.15M dollar major league deal which included a $2.75M signing bonus. It’s likely Purke’s earning potential will never be higher than it was in 2009. Balance the desire for a level field of play against the draft’s effect on high school and college athletes. Is sacrificing their rights necessary to competitive balance? Hardly. Major League Baseball, the Players’ Association and fans all have an interest in keeping the status quo. If draftees want a slice of the pie, it will need to come from a legal challenge. Last month, Jean-Louis Dupont announced he would bring an action against the Union of European Football Associations’ Financial Fair Play regulation on the following grounds: Restriction of investments; Fossilization of the existing market structure; Reduction of the number of transfers, of the transfer amounts and of the number of players under contracts per club; Deflatory effect on the level of players’ salaries; and consequently, a deflatory effect on the revenues of players’ agents (depending on the level of transfer amounts and/or of players salaries. Dupont also notes the regulation’s infringement on fundamental freedoms of the European Union, “free movement of capital, free movement of workers, and free movement of services (player agents).” Sound familiar? Financial Fair Play is a different regulation with different ramifications, but Dupont’s lawsuit and the draft’s consequences share a common thread. Its generally accepted that wage and movement suppression is frowned upon. Should Dupont’s name sound familiar, that’s because he had success in a similar past action. In 1995, Dupont won a landmark players’ rights case on behalf of Jean-Marc Bosman before the European Court of Justice. Athletes’ rights are just as important as your own and it’s only a matter of time before the American courts hear a similar case. In 1999, Commissioner Selig created a “Blue Ribbon Panel” to come up with a plan to address the competitive balance issues the sport was facing. Since that time, the league has greatly increased revenue sharing and instituted the luxury tax, flattening salaries between the top and mid-level franchises, helping create the current era of unprecedented parity in Major League Baseball. Given the success of competitive balance manipulation through revenue adjustments, it’s fair to wonder if the draft is really even necessary to achieve that goal. While the draft may promote competitive balance to some degree, it’s worth noting that it was in place for the entirety of the time that the sport was dominated by a few marquee franchises. The draft’s relatively minor impact on competitive balance compared to increased revenue sharing means that perhaps the effects of eliminating the draft could be offset with further financial adjustments. If we could maintain the current level of competitive balance while doing away with draft, perhaps that would be the fairest outcome of all.

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