In 1976 a free agency provision was added to the contracts of major league baseball players. Before free agency, all players received a base pay and were signed to a team indefinitely. They could not leave a team unless that team traded them. Free agency allows baseball players to receive offers from other teams once their contract has expired with their current team. The players put themselves on the open market to be selected by the highest bidder. This new system opened up the market to allow players to pursue salaries that matched their talents.

CS Question #1: What is free agency?

In 1879, eight years after the establishment of professional baseball, the franchise owners added a reserve clause. The reserve clause dictated that once a player signed a contract with a team, that player was tied indefinitely to that team. The player had little or no ability to pursue higher wages, decide where he worked and for whom he worked. The players found themselves in the grips of a monopsony. A monopsony is a labor market in which there is only one employer. This removed all competition in the marketplace and allowed each franchise to set the wage rate of the players.

CS Question #2: What does the labor demand curve look like in a monopsony?

Baseball has taken appropriate and effective steps to remove certain monopsonistic factors. However, some aspects still exist. This has occurred because the labor market is very specialized. It is the only labor market with a demand for baseball players. These franchises have developed regulations that reinforce a monopsonistic market. Owners still require that new players sign seven-year contracts with a team. After six years, the player can seek free agency. The salaries these new players receive are often much less than they would receive if they entered the market through a draft. In order to add a franchise, a consensus of all the owners is required. Each team is limited to 25 members. This limits the size of the entire marketplace and limits labor demand for new players.

CS Question #3: What do you suggest to make the baseball industry more competitive? Would more competition be better or worse for baseball?

The effect of free agency on baseball salaries was immediate and obvious. In November of 1976, after the ratification of the basic agreement, 25 players entered Major League baseball through its first reentry draft. The average salary for these players increased from $51,501 to $76,349. This trend continued, and by 1994 the average free agency-negotiated salary was $1 million.

In many ways, the game of baseball was positively affected by the creation of free agency. From the very beginning of free agency, players were willing to sign multi-year contracts with franchises that were willing to pay them the wage they demanded. This provided stability and morale to the teams. Permitting economic competition in baseball also increased competition in the game. After the 1976 ruling, dynasty teams such as the New York Yankees were no longer guaranteed to win the championship. In the five years following 1976, several different teams won the World Series with the assistance of players hired through free agency.

CS Question #4: How did free agency hurt the game of baseball?

Further Thought:

1. Was the restructuring of the professional baseball market beneficial to fans?
2. Is there any way to completely open the baseball labor market? What effects would this have upon the game?
3. Are monopsonies positive or negative aspects of an economy?