See the results of our 2022 Personal Finance Study!
Pro Athletes Make a Lot of Money, and Free Agency Is a Big Reason Why
As anyone who has ever had to bid against their friends and/or coworkers in a fantasy football draft can tell you, it is incredibly easy for the price of players to get out of control—and fast. But in real sports, the big price tags for players don’t happen through the draft. They happen through free agency. That’s because free agency is the only time where players are able to offer their services to any team willing to sign them.
Here on the OppLoans Financial Sense Blog, we’re always pro people making an extra buck or two—or, when it comes to professional athletes, an extra million or so. So we decided to dive into the history of free agency in sports to let you know how it came about and how it’s taken player salaries from pretty all right to a total home run.
1879-1975: Major League Baseball and the reserve system.
As America’s oldest professional sports league, Major League Baseball (MLB) was the organization that all the other leagues—like the NFL, NBA, and NHL—imitated in their approach to labor relations and player salaries. The MLB is the reason that free agency took so long to take hold in American sports—but it’s also the place where the shift finally occurred.
In 1879, the business of baseball was booming, and so the fledgling National League took steps to prevent player salaries from growing beyond their control. They took an unofficial handshake agreement between teams not to poach each other’s five best players and turned it into an official, on-the-books rule. Over the course of the 1880s, this rule expanded to cover teams’ entire rosters.
And thus, baseball’s reserve system was born.
The reserve system was based on something called the reserve clause. Here’s how it worked: When a player’s contract with a team was up and they couldn’t come to terms on a new one, the reserve clause allowed the team to renew the player’s old contract for the following year at the same salary.
But here’s the catch: The one-year option also implicitly contained the reserve clause, which meant that the team could just keep renewing a player’s contract year-to-year until the player decided to either retire or sit out a year in order to sign with another team. Otherwise, a player’s only option to play for a new team was to convince his current team to trade him.
Through the first half of the 20th century and well into the second half, this system remained in place, with other leagues following suit. Even when the NFL limited their reserve clause to a one-time-only use in 1947, it would still be another 16 years before a free agent would actually switch teams when R.C. went from the San Francisco 49ers to the Baltimore Colts.
In response, the NFL adopted the “Rozelle Rule” which dictated that the signing team had to provide “compensation” to the team the player was leaving, effectively chilling player movement.
Now, it wasn’t like these athletes were playing for pennies. Players made good money, and star players made very good money, with their teams frequently signing them to contracts beyond the simple rollover of their previous agreement. But players were still making far less than they would have without the leverage provided by free agency, with multiple teams bidding against each other for their services.
Things wouldn't change until the 1970s, and when they did it was thanks to three men in particular: player Curt Flood, lawyer Peter Seitz, and player’s union president Marvin Miller.
1970-1976: Goodbye reserve system, hello free agency.
Following the 1969 season, St. Louis Cardinals center Curt Flood believed that he was due for a big raise. After all, he was a two-time World Series Champion, a three-time All-Star, and a Seven-Time Gold Glove Winner. Cardinals ownership, however, disagreed. They offered him only a minor raise, well short of what he sought. The two sides became estranged, which meant that the only option left was a trade.
After 12 years spent suiting up for the Cardinals, Flood was traded (along with other players) to the Philadelphia Phillies. And there’s no nice way to say this, but the Phillies back then really stunk. As such, Flood did not want to play for them and refused to report.
With the backing of his union—and of union president Marvin Miller in particular—Flood wrote to MLB commissioner Bowie Kuhn and demanded that he be declared a free agent.
When Kuhn denied Flood’s request—citing the reserve clause—Flood sued him and Major League Baseball in federal court. The one million dollar suit made its way to the Supreme Court, where it was heard on March 20, 1972. By a decision of 5-3 (with Justice Lewis Powell recusing himself), the Supreme Court ruled against Flood in favor of Kuhn and Major League Baseball.
While Flood didn’t defeat the reserve system, the cracks were certainly beginning to show. In 1974, independent arbitrator Peter Seitz voided star Oakland Athletics pitcher Catfish Hunter’s contract with the team after A’s owner Charlie Finley (a notorious cheapskate) refused to hold up certain provisions. Now a free agent, Hunter signed with the New York Yankees for a salary that made him the highest-paid pitcher in MLB history.
In late 1975, the Major League Baseball Players Association (MLBPA) filed grievances on behalf of veteran pitches Andy Messersmith and Dave McNally, both of whom had played under the reserve clause for the preceding season. According to the grievance, both players had played under the clause, per their contracts, but had not signed a new contract afterward. Therefore, they should be declared free agents.
The case went to a three-person arbitration panel that featured one representative from each side of the dispute and a neutral arbitrator. Miller represented the players, MLB Player Relations Committee chief negotiator John Gaherin represented the owners, and Seitz served as the impartial arbitrator.
On December 23rd, 1975, Seitz ruled in favor of Messersmith and McNally, reasoning that their contracts did not include the right for owners to indefinitely revoke the reserve clause. After it had been invoked once, the contract was ended. Teams would now have no option but to sign players to multi-year contracts—and to bid against each other in doing so.
The result of this ruling could have been complete and utter chaos, as it would have meant that almost every single contract in Major League Baseball was null and void. But that’s where Miller stepped in to negotiate a compromise: Players would only become free agents when their contracts expired and they had already accumulated six years of major league service time.
To kick off the free agency era, the following 1976 season began with a “re-entry draft” in which teams drafted the bargaining rights to players. If your rights were drafted by three or more teams, you could only negotiate with those teams, but if you were drafted by two teams or fewer, you could negotiate with every team.
As clubs jockeyed for the right to sign stars like Reggie Jackson and Rollie Fingers, player salaries were already on the rise.
Professional athletes make a lot more money now.
As the free agency era took hold, player salaries in the MLB began to grow—slowly at first, but quickly gaining steam. In just a five-year span between 1977 and 1981, average MLB player salaries rose by an average of $26,380 per year from $76,066 to $185,651, a total increase of over 140 percent!
For comparison: In the five years spanning the 1971 through 1975 seasons, average player salaries rose by an average of $3,075 per year from $31,543 to $44,676, for a total increase of only 41.6%. Free agency basically took normal MLB salary growth and added double what the average player was already making on top of it.
That growth hasn’t stopped, either. In 2018, the average salary for an Major League Baseball player was $4.095 million. And 2018 was actually one of the few years that the average MLB player salary was down from the previous year. In 2017, the average MLB player salary was $4.097 million, representing a year-over-year drop of $1,436 in average annual money.
Meanwhile, it took the NFL a while to catch up on free agency, and a great deal more pain for players, fans, and owners. In 1987, NFL players went on strike, and the NFL responded by finishing the season with replacement players. In 1989, the player’s union sued the NFL but had their case dismissed, forcing them to decertify the union and sue the league as individuals. It wasn’t until the 1993 Collective Bargaining Agreement that the NFL owners agreed to institute free agency.
Still, NFL players were able to realize some large salary increases of their own, even before free agency was implemented. Perhaps spurred on by the success of their MLB counterparts—and jealous of their sizeable paychecks—the NFL player’s union adopted a much stronger hand in the 1980s, one that led to a large boost in salaries.
Still, the players would not be satisfied until they had the right to free agency—a fight they eventually won in exchange for the NFL instituting a salary cap
In the NBA, the right for free agency was codified in the 1988 Collective Bargaining Agreement, with the stipulation that players had to have been in the league for seven-plus years and had to have completed at least two NBA contracts. Between 1988 and 1998, the average NBA salary increased by approximately $2 million dollars per year.
Now, not all of this wage growth is due to free agency. There’s inflation, for one thing, and the fact that sports league revenues, in general, have skyrocketed over the past 30 to 40 years, due in no small part to the billions and billions of dollars they earn through their TV deals. But it’s also undeniable that the right to choose their employer and negotiate between many different offers has been great for players across all sports.
Free agency has become so important that the recent chill in free-agency signings and contracts in Major League Baseball portends some serious labor strife when their next collective bargaining agreement is up. As teams get smarter about how they spend their money—and also, perhaps, more concerned with maximizing profits than winning games—a players strike or lockout looks increasingly likely.
It was the MLB that started this whole shebang almost 150 years ago, and it will also be the arena where the next great battle over player movement and salaries is fought. Some things never change.