Optimal compensating wages for military personnel

Abstract

The current U.S. military pay structure offers inequitable and inefficient wages across locations. Military personnel are paid less competitive wages in high-cost and/or low-amenity locations compared to low-cost and/or high-amenity locations. This pay system results in unequal reenlistment rates across locations, which leads to production inefficiencies caused by short-term manning shortages in highturnover locations. Wages set according to local civilian compensating wage differentials would result in a more stabilized force (across locations) by equalizing the opportunity cost of staying in the military at each location. Additionally, more personnel would volunteer to serve in the high-cost and/or low-amenity locations because wages would be more commensurate with local costs and amenities. This would result in fewer non-volunteer assignments to undesirable locations and a minimized opportunity cost for personnel serving at each location. Reenlistment simulations on first-term Air Force personnel show that the proposed wage structure would better equalize reenlistment rates across locations. This proposal could be implemented at no cost to the government by cutting wages in low-cost and/or high-amenity locations. A gradual implementation in which such wages are frozen or increased slowly may be more politically palatable. © 2005 by the Association for Public Policy Analysis and Management