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Regime Switching and Wages in Major League Baseball under the Reserve Clause

  • Haupert, Michael
  • Murray, James

Over the course of the 20th century American wages increased by a factor of about 100, while the wages of professional baseball players increased by a factor of 450, but that increase was neither smooth nor consistent. We use a unique and expansive dataset of salaries and performance variables of Major League Baseball pitchers that spans over 400 players and 60 years during the reserve clause era to identify factors that determine salaries and examine how the importance of various factors have changed over time. We employ a Markov regime-switching regression model borrowed from the macroeconomics literature which allows regression coefficients to switch exogenously between two or more values as time progresses. This method lets us identify changes in wage determination that may have occurred because of a change in the league's competitiveness, a change in the relative bargaining power between players and teams, or other factors that may be unknown or unobservable. We find that even though Major League Baseball was a tightly controlled monopsony with the reserve clause, there was a significant shift in salary determination that lasted from the Great Depression until after World War II where players' salaries were more highly linked to their recent performance.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 29094.

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Date of creation: 23 Feb 2011
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Handle: RePEc:pra:mprapa:29094
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  1. Chang-Jin Kim & Charles R. Nelson, 1999. "State-Space Models with Regime Switching: Classical and Gibbs-Sampling Approaches with Applications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262112388, June.
  2. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March.
  3. Kim, Chang-Jin, 1994. "Dynamic linear models with Markov-switching," Journal of Econometrics, Elsevier, vol. 60(1-2), pages 1-22.
  4. Lawrence M. Kahn, 2000. "The Sports Business as a Labor Market Laboratory," Journal of Economic Perspectives, American Economic Association, vol. 14(3), pages 75-94, Summer.
  5. Krautmann, Anthony C, 1999. "What's Wrong with Scully-Estimates of a Player's Marginal Revenue Product," Economic Inquiry, Western Economic Association International, vol. 37(2), pages 369-81, April.
  6. Jushan Bai & Pierre Perron, 1998. "Estimating and Testing Linear Models with Multiple Structural Changes," Econometrica, Econometric Society, vol. 66(1), pages 47-78, January.
  7. Scully, Gerald W, 1974. "Pay and Performance in Major League Baseball," American Economic Review, American Economic Association, vol. 64(6), pages 915-30, December.
  8. Anthony C. Krautman & Margaret Oppenheimer, 2002. "Contract Length and the Return to Performance in Major League Baseball," Journal of Sports Economics, , vol. 3(1), pages 6-17, February.
  9. Frank, Robert H, 1984. "Are Workers Paid Their Marginal Products?," American Economic Review, American Economic Association, vol. 74(4), pages 549-71, September.
  10. Anthony C. Krautmann & Elizabeth Gustafson & Lawrence Hadley, 2003. "A Note on the Structural Stability of Salary Equations: Major League Baseball Pitchers," Journal of Sports Economics, , vol. 4(1), pages 56-63, February.
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