Baseball’s Broken Pay System
The Problem
Imagine working your whole life for one moment to get to the big leagues in Major league baseball. You start out performing all of your teammates, then you’re being told that you’re going to be paid less because of a rule in baseball that has been going on forever. This is called arbitration, this is the period in time when you are no longer a rookie, but you’re also not a full free agent yet. The service time of arbitration is around 3 to 6 years. This is when a player and a team are both going to submit a salary number for the upcoming season. The arbitrator must choose one of the numbers. They cannot do a split of the difference or do anything in between. For example, if a player wants $4 million, but the team offers 1 million. The arbitrator will have to choose between the two numbers based on the players performance. It is about a 50-50 split based on who wins, either the team or the player. The team seems to usually be favored more than the players.
No other sport does anything like this, all of the other sports do contracts in a similar way. They will have a rookie contract and then you will be able to go into free agency once your rookie contract is over. The league service time and system means that the best young players in baseball are often the most financially exploited athletes in professional sports.
How the System Works
To get the full understanding of why these young players are being underpaid you have to understand the service time rules.
The first two years are called pre-arbitration. Teams are allowed to pay whatever they want above the league minimum, and the player gets no say or leverage on what they get paid.
The next three years, is actual arbitration. The players are now able to make arguments to get a higher salary in front of a panel of people. Even though they are still able to go through this process, the system still heavily favors what the team wants to do.
Then after the sixth year of arbitration, the player is now able to go to the open market, which is called free agency.
So, a player has to wait six years before they are finally able to negotiate contracts without having to do anything with arbitration. Then also, players tend to be more valued during free agency because they get to freely negotiate their contracts and value themselves correctly. The reason why this is so crazy is because the NFL in the NBA both have four years of rookie contracts. Then they are able to go into free agency. The average MLB career last fewer than six seasons, so this means that a lot of players don’t ever get to reach free agency because of arbitration.
You can access the dataset here: MLB Data
Data Dictionary
Lahman Dataset
playerID = Unique player identifier
yearID = Season year
teamID = Team abbreviation
lgID = League identifier AL or NL
salary = Player salary in US dollars
nameFirst = Player first name
nameLast = Player last name
HR = Home runs hit that season
AB = At bats that season
full_name = Combined first and last name
hr_per_million = Home runs per 1 million dollars earned
MLB_DATA
player = Player full name
salary = Player salary for 2024 season
hr = Home runs in 2024 season
hr_per_million = Home runs per 1 million earned 2024 season
Part 1: The 2012-2016 Era
I have decided to use the lahman data set to cover the 2012 to 2016 era for MLB salaries in statistics. We are going to start by focusing on 2012 through 2016 as our historical era. Then see what is happening in a more recent season.
League Minimum Salary by Year (2012-2016)
The data does show that the league minimum salary does continue to rise after every single year. The stuff sound great, but during that same time. Free agents were signing deals that were worth 25 to 30,000,000 per year. So the floor was not moving by a lot, but the ceiling was going up drastically.
Salary Distribution (2012-2016)
This graph shows us that we have a lot of players in the MLB that are on arbitration and aren’t making a lot of money. The large amount of players are all players that are in the pre-arbitration phase. They are earning at or near the league minimum regardless of how well they are playing since they are still under that 0 to 2 year phase. Looking more towards the right side of the graph, you can see the small group of players that are players that are going through free agency, and I’ve earned the right to be paid with their worth. The large gap between those two groups of people is where the problem is.
Home Runs vs. Salary (2012-2016)
We do see a positive trend when looking at the graph, but when you look more towards the left side of the chart, you can see that players are hitting 20 home runs and Who are also earning league minimum pay. These are good players that are just young and they are locked into the pre-arbitration deals where the rules are setting the prices that they should be paid.
Most Underpaid Power Hitters (2012-2016)
Looking back on the 2012 to 2016 seasons, a lot of of these names should seem familiar to people that watch baseball. A lot of these players became stars and some of these players are still stars today. These players were delivering elite production and they weren’t getting paid the amount of money that they should’ve been getting paid. Every bar on this chart represents a season where a team got millions of dollars worth of offensive value at league minimum prices. This is all happening because of the arbitration rules that have been placed by the league.
Now let’s take a look at 2024 Data
Players Avg HR Median Salary Highest Salary Lowest Salary
1 112 15.9 $11,000,000 $46,000,000 $700,000The Lahman dataset did show us a lot of what happened in the 2012 to 2016 era. But that was also 10 plus years ago. Arbitration has changed a little bit in the league minimum has gone up. So, I want to see if the problem with arbitration has gotten any better since 2012.
HR vs Salary (2024)
This graph does look a lot like the 2012 graph that we looked at earlier when looking at the Lahman data. The trend line does still go up in a positive pattern, but we still have players that are hitting 30+ home runs and they aren’t being compensated correctly for what they are producing. So even though, we jumped ahead 10 years. We still are not seeing any changes with arbitration as a whole.
Most Underpaid Players (2024)
We are seeing different names when looking at the new most underpaid players. But this is essentially the same story that we were seeing when looking at the 2012 to 2016 data. The main example, is Julio Rodriguez. He is producing more than any player and he is being paid the least. As you can see this data also shows a maximum of $10 million salary. All of these players are still below the median salary.
Part 3: Research Question
Has MLB’s arbitration system continued to underpay its best young power hitters, and does the data from 2024 show the same patterns of underpayment seen in the 2012–2016 era? Let’s put them side by side to see if anything has really changed.
This graph tells us that the players from 2012 were getting less pay for the same production. But, since the league minimum has gone up. Of course the 2024 is going to be different from the 2012. But with the league minimum going up, it means that the salaries that the players are making in free agency has been going up as well. The gap between what young players produce and what they get paid has not closed.
Conclusion
The main reason why I wanted to look more into the arbitration topic is because a lot of players that play professional baseball get super underpaid when they first make it to the show. It is unlike any other sport, these players that are still under arbitration have to wait so long just to get a real contract. My team the Detroit Tigers have been on the wrong side when it comes to arbitration recently, not playing the star players on their roster what they really deserve. The main problem with arbitration that I see is that it causes this unnecessary friction between the player that is trying to get paid and the team that is paying the player. I honestly believe that is why a lot of players do not stay loyal to the team that they were drafted by when they are able to get into free agency.
The data from two completely different sources one showing the historical baseball database covering 2012 to 2016 and then also looking at a more fresh version from 2024. It says the same story essentially, that players that are in this arbitration phase are not being paid what they are worth. The best young players are being underpaid while their teams are pocketing all of the profit. We have seen negotiations over the decade, the league minimum has gone up, but we still see the same story how players are not being paid what they are worth. These young star players are earning a fraction of what they would actually get based off their market value based off of production. This is all because the rules say that they have to go through the arbitration phase. This is not a super complicated change. The lead could start by making arbitration a shorter service time. So the players can go into free agency as soon as possible. Then making adjustments to the rookie pay scale, so it actually reflects what the player is worth. Also making changes to the rules that create such friction between a player and the team that they play for. Since they are competing against each other when it comes to an arbitration ruling. Until this happens, baseball will continue having players that aren’t getting paid what they are worth, and players will continue to get an arguments with the team that they were drafted by. A lot of of the star players will continue to earn less than the veteran backups that they are starting over. And that is just not fair to these younger players.