November 27, 2014
Until 1976, team owners of Major League Baseball (hereinafter MLB) used the “reserve clause” as a mechanism to prevent free hiring of players in professional baseball. Under this clause, players who signed with a team had unlimited restriction to play with any team, unless players were sold or traded by agreement between the managers. Although the rationale for this provision was based on promoting competition within the sport, this instrument only served to maintain low wages to MLB baseball players.
The most important economic impact of the reserve clause was to give MLB team owners a monopoly power in hiring athletes (known as “monopsony”). Economic theory predicts that when companies (teams) have a monopoly on hiring employees (players), the result is that they perceive a lower salary than they would receive if they could offer their services on the open market (or free agency), which is entirely determined by their productivity. The difference between the contract salary and free market salary is known as worker exploitation. As the reserve clause eliminated competition in hiring players, giving the opportunity to pay low wages, it served for many decades as a tool for team owners exploiting any players.
Economic studies conducted during the 1970s show that MLB athletes received only between 20% and 40% of salary in line with their productivity (Scully, 1974). As expected, the lack of competition made the team owners pay wages that were only enough to keep players hired.
In 1976, after an arduous process of collective bargaining and agreements between players and team owners, MLB instituted free agency and regulated the labor market as we know it today: players with less than six years of experience are hired under the reserve clause and players with more than six years of service could opt for free agency.
The impact of the introduction of free agency on the wages of workers was amazing. In the 1980s, new research showed that the first family of free-agent players received wages equivalent to 95%-98% of their productivity (Quinton, 1982; Raimondo, 1983). However, more recent studies show that there is still evidence of exploitation in the players with less than three years of experience due to playing under the reserve clause. For players who have three to six years of experience, although they still play under this clause, they do not suffer problems of exploitation because they have the opportunity to re-negotiate their wages by arbitration. Exploitation is virtually nonexistent on players who enjoy free agency (Marburger, 1994; Gustafson and Hadley, 1995).
Monopolies arise when in the market are enforced rules or laws that prevent the free negotiation of economic agents. This may occur when one (or more) companies have exclusivity to provide a good or service or hire workers or production inputs. In all cases, monopolies harm society because they exploit the economic agents, either by paying low wages or charging excessive prices on the products they trade. Also monopolies produce goods and services of poor quality or inadequate amounts to people’s demand.
There is a wide variety of economic sectors that operate as monopolies (or oligopolies) in Dominican Republic. For example, winter league baseball maintains a reserve clause system similar to that used in the beginning by the MLB. On the public sector side, there is a monopoly in hiring physicians who attend specialties (hence it is not surprising that these accrue wages of only 25,000 pesos!).
Other monopolies existing in our country are in markets of fuel import, distribution and retail sales, in the electricity production and distribution, in the agricultural products import, in passenger transport, in freight, in water service, in ports management. In short, the list is quite extensive. In all cases, the lack of competition in these markets generates a detriment to society.
As free agency has benefited MLB players in obtaining higher wages, if we want to improve the income level of Dominicans it’s just time for us to consider a review and removal of monopolies enjoyed by some economic sectors. Monopolies (or oligopolies) operating in our country have been justified in many ways. However, these privileges only harm workers, depressing wages, or consumers, deserving goods and services at the best price and highest quality.