Estimating Baseball Salary Equations from 1961-2005: AL ook at by P1OBWG

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									By Gary Stone and
Louis J. Pantuosco
The Three Era’s Examined:
1. 1961-1973 The beginning of baseball
2. 1974-1983 The early years of arbitration
   and Free Agency
3. 1999-2005 Modern Era of baseball.
• Average player salary in the MLB mushroomed
  from $29,303 in 1970 to $597,537 in 1990.
  Since then, the salary has climbed to $3.15
  million for the 2008 season. Even rookies and
  marginal players have witnessed sizable leaps in
  their wages as the minimum annual salary
  increased from $12,000 in 1970 to $390,000 in
  2008.
• In 1961 the average players salary was double
  the average working salary in the US, as of
  2008 it is now 70 times the average working
  Salary.
• What accounts for the dramatic boost in
  salaries over the past four decades?
• Are player salaries simply becoming more
  aligned with their marginal revenue
  products?
• Have league operating parameters changed
  the compensation of the players?
• Is the fans’ attraction to the game the
  cause of the salary escalation?
1961-1973
• Had a strict restrictive reserve clause in place, prevented players from
  moving from team to team.
• Long-term contracts were unusual
• Owners had a monopolistic power over players therefore salaries were
  low.
1974-1983
• Coming right after the first players strike in MLB history certain
  changes took place.
• Players had the right to arbitration in contract disputes. (Salary
  arbitration)
• The Players Association obtained the rights to Free Agency. With the
  market changing and team fighting for premiere players’ salaries rose
  dramatically in this era.
1999-2005
• With the rising revenues from TV Contracts, greater influence of player
  agents, we have seen the mobility of players in the MLB increase.
For hitters we will look at: Slugging percentage,
 Stolen-bases-per game ratio, How many at
 bats, Years in the major leagues, Population of
 the area where the team is located, and what
 league the team is in which they play for.

Formula:
LSALCPI (Hitter i) = a0 + a1 LSA + a2 LSBPG +
 a3 LABPCT + a4 LYRM + a5 LPOP + a6 NL +
 e1
For a pitcher we will look at: Strikes to walks,
  inning’s pitch percentage compared to total
  season, Years in the major, Population of the area
  where the team is located, and finally what league
  the team is in which they play for.

Formula:
LSALCPI (Pitcher i) = b0 + b1 LSW + b2 LIPPCT +
  b3 LYRM + b4 LPOP + b5 NL + e2
Period                  Hitters Pitchers                    Total
1961-1973                499     526                        1,025
1974-1983                960     619                        1,579
1999-2005                2,228   1,718                      3,946

For the 1961-1973 period the researchers sent out mail to former players in the
   MLB and asked for their yearly wages they received a response of 22%.
1974-1983 research was collected from The Sporting News.
1999-2005 due to the strike of 1994, and to have uninterrupted data the
   Professors decided to take the data from the 99-05, this information was
   taken from USA today.
                        1961-1973           1974-1983           1999–2005

        Constant        0.0660**            -1.6499**           -2.694**
        LSA             0.2139**            0.7677**             1.882**
                        (.0816)             (.1221)              (.1126)
        LSBPG           -0.0135             0.4280*             -0.028**
                        (.0112)             (.1747)             (.0084)
        LABPCT           0.3387**           0.6163**            0.746**
                        (.0265)             (.0545)             (.0357)
        LYRM            0.3829**             0.3513**           0.656**
                        (.0227)             (.0378)             (.0285)
        LPOP             0.0806**           0.0233              0.095**
                        (.0218)             (.0333)             (0266)
        NL              -0.0290*            0.0512**            -0.0007
                        (.0118)             (.0152)             (.0153)
        R2               0.73               0.41                0.76
        DF              493                 954                 2,222
Standard Deviations in parenthesis                        *Significant at the 0.05 level%
                                  **Significant at the 0.01 level
     Constant             -9.99**                      Year 1                    0.9938**
     LSA                 1.692**                                                 (.1123)
                                                       Year 2                    0.8112**
                         (.3232)
                                                                                 (.0991)
     LABPCT               0.4331**                     Year 3                    0.7357**
                         (.0844)                                                 (.0867)
     LYRM                1.395**                       Year 4                    0.5643**
                         (.1736)                                                 (.0753)
     LPOP                -0.003                        Year 5                    0.4037**
                                                                                 (.0634)
                         (.0338)                       Year 6                    0.1545*
     LSBPCT              .2702**                                                 (0540)
                         (.0721)                       DF 2,                     216
     NL                   -0.0356                      R2                         0.40
                         (.0494)

Standard Deviations in parenthesis                        *Significant at the 0.05 level%
                                  **Significant at the 0.01 level
To put the results into perspective, Mickey
Mantle, the New York Yankees’ perennial All-
Star, earned $90,000 in 1961. If salaries were
estimated in the 1960s using the productivity
elasticities of the modern era, Mantle would
have been paid $1.4 million in 1961, and $10.5
million in 2007. Although these salaries tower
over the one received by Mantle in 1961, they
are dwarfed by Derek Jeter’s current Yankee
salary of over $20 million a year.
                           1961-1973           1974-1983 1999–2005
      Constant              -0.0110**          0.2982              1.56**
      LSW                  0.3807**            0.1947*             0.693**
                           (.0437)             (.0839)             (.064)
      LIPPCT               0.2895**            0.3344**            0.626**
                           (.0235)             (.0577)             (.0311)
      LYRM                 0.3547**            0.5072**            0.806**
                           (.0193)             (.0434)             (.0268)
      LPOP                 0.0302              0.0190              0.231**
                           (.0201)             (.0396)             (.0279)
      NL                   0.0236*             0.0764**            -0.007
                           (.011)              (.0215)             (.0161)
      R2                   0.71                0.34                0.79
      DF                   520                 613                 1,712

Standard Deviations in parenthesis                        *Significant at the 0.05 level%
                                  **Significant at the 0.01 level
     Constant            1.6144**                 Year 1              0.4805**
     LSW                 0.3244*                                      (.1186)
                                                  Year 2              0.4505**
                         (.1578)                                      (.1068)
     LIPPCT              0.3823**                 Year 3              0.4355**
                         (.0886)                                      (.0961)
     LYRM                1.2837**                 Year 4              0.4127**
                                                                      (.0858)
                         (.0999)
                                                  Year 5              0.2750**
     LPOP                0.1572**                                     (.0685)
                         (.0369)                  Year 6              0.1100
     NL                  0.0246                                       (.0563)
                         (.0540)                  R                   2 .562
                                                  DF                  1706
Standard Deviations in parenthesis                        *Significant at the 0.05 level%
                                  **Significant at the 0.01 level
To put these results into perspective, the Los Angeles Dodgers’
  ace pitcher, Sandy Koufax, earned $125,000 in 1966. If
  salaries were estimated in the 1960s using the productivity
  elasticities of the modern era, Koufax would have been paid
  $3.6 million in 1966 and over $25 million in 2007.10 This
  contract rivals Roger Clemens’ $28 million deal in 2007.
• Hausman test indicates that the standard errors are largest
  in the second era. When free agency and arbitration were in
  their infancy stage.
• In the first era the model explained 71% of salary
  determination for pitchers and 73% for hitters.
• The second era these numbers dropped to 34% for pitchers
  and 41% for hitters.
• Owners have become more aware of the financial benefit that
  productive players, experienced players and consistent
  players, overall the MLB product has approved.
• Modern Era more information available we see the numbers
  rise, but also due to agents starting bidding wars for their
  clients. Also the players union negotiating terms that
  benefitted all players.
• Players with the same productivity earn more
  in the modern era than in earlier eras.
• 1961-1973 MLB determination process was
  fair in this era, even though arguments are
  made that salaries were below their marginal
  revenue product.
• During free agency the link between salary
  and marginal revenue product weakened.
• Modern era with more information team
  owners, salaries still increased due to growing
  strength of the players’ union, and fan base.
• What accounts for the dramatic boost in
  salaries over the past four decades?
• Are player salaries simply becoming more
  aligned with their marginal revenue
  products?
• Have league operating parameters changed
  the compensation of the players?
• Is the fans’ attraction to the game the
  cause of the salary escalation?
• Since MLB continues to increase it’s
  product, and with growing profits due to:
  TV revenue, gate receipts, concessions,
  and merchandising
  The more productive players salaries will
  increase.

								
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