782 AD-A281 DTIC SJUL ELECTE .S F 19D" 14 Military Pay Gaps and Caps Ihisd James R. Hosek, Christine E. Peterson, __ en, i-b een approved Joanna Zorn Heilbrunn for public :elese a.nd sole; its dis ibutiou 1 lijted. 94-21706 vauonal Defense Research Institute I I__ _ ~ 0 IIII ll •II I The research described in this report was sponsored by the Assistant Secretary of Defense (Personnel and Readiness). The research was conducted in the National Defense Research Institute, RAND's federally funded research and development center supported by the Office of the Secretary of Defense and the Joint Staff, Contract MDA903-90-C-0004. Ubrary of Congress Cataloging In Publication Data Hosek. James R. Military pay gqs ard cas / James R. Hosek. Christine E. Peterson. Jouma 7.H eilbrmum. p. cm. "Prepared for the Assistant Secretary of Defeae (Personnel & Readiness)." Includes bibliograpincal references. "MR-368-P&R." ISBN 0-8330-1514-1 1. United States-Armed Forces-Pay, aflowar -,e c. I. Peterson. Christine E. 1954-- I.H eilbru,&. Joama 7. . M1.U nited Sum Office of the Assistant Secretary of Defense for Personnel and Readiness. IV. Title. UC74J167 1994 355.6"4"0973--dc2O 944160 CIP RAND is a nonprofit institution that seeks to improve public policy through research and analysis. RAND's publications do not necessarily reflect the opinions or policies of its research sponsors. Published 1994 by RAND 1700 Main Street, P.O. Box 2138, Santa Monica, CA 90407-2138 To obtain information about RAND studies or to order documents, call Distribution Services, (310) 451-7002 Military Pay Gaps and Caps James R. Hosek, ChristineE . Peterson, Joanna Zorn Heilbrunn Preparedf or the A,_ Assistant Secretary of Defense Accesion For (Personnela nd Readiness) NTIS CRA&I DTIC TAB 0 Unannoucec E Justification....... By ...... Distribution I National Defense Research Institute Availability Codes Avail arid/or Dist Special Approved for public release; distribution unlimited liii Preface This research was prompted by the Clinton Administration proposal last spring that military pay growth be capped below civilian wage growth from 1994 to 1997. The proposal sought to reduce defense budget outlays and control growth in the federal deficit. In addition to those goals, two factors may have added to the apparent attractiveness of military pay caps. First, because the defense drawdown reduces the demand for military personnel, some argue that military pay itself can decline without damaging the nation's capability to meet its future military manning requirements. Second, lending support to the position that military pay can slip downward relative to civilian pay without harm, it is widely perceived that military pay has fallen relative to civilian pay steadily since 1982, but that recruiting and retention problems did not arise during the 10 years following 1982. Although the pay cap proposal was ultimately not enacted, it nonetheless raises issues that remain salient because of the continuing interest in curbing defense spending and the deficit. The present research critiques the perspective that proposed caps on military pay growth pose little risk to the strength and quality of the active duty enlisted force. Building on previous research (James R. Hosek, Christine E. Peterson, Jeannette Van Winkle, and Hui Wang, A Civilian Wage Index for Defense Manpower, R-4190-FMP, RAND, 1992), the authors reconsider the size of the existing military/civilian pay gap, dispel the perception that military/civilian pay fell during the 1980s yet recruiting and retention were unaffected, and caution against the Administration's program of pay caps unless selective offsets in the form of expanded enlistment and reenlistment bonuses and supplemental educational benefits are put in place. This work should be of interest to the defense manpower policy community and, more generally, to civil sector and private sector leaders who rely upon broad wage indexes for guidance in determining annual pay adjustments. The research was conducted for the Assistant Secretary of Defense for Personnel and Readiness and undertaken within the Defense Manpower Research Center, part of RAND's National Defense Research Institute, a federally funded research and development center sponsored by the Office of the Secretary of Defense and the Joint Staff. Contents Preface .................................................. iii Figures .................................................. vii Sum m ary ................................................. ix Ackowledgments .......................................... xiii 1. INTRODUCTION ....................................... 1 2. PAY GAP COMPARISONS ................................ 3 The ECI and the DECI .................................... 3 Three Guidelines for Pay Gap Comparisons .................... 4 Overall Pay Gap: ECI Versus DECI .......................... 6 Many Kinds of Gaps Exist ................................. 8 Pay Gaps for Enlisted Personnel and Officers .................. 9 Pay Gaps by Occupation ................................. 14 Pay Gaps by Age Group ................................. 16 Summary of Pay Gap Results .............................. 17 3. IMPLICATIONS FOR PAY CAPS ........................... 19 Appendix A. PAY GAP COMPARISON BETWEEN THREE-WAY AND FIVE- W AY DECIs ........................................... 25 B. CORRESPONDENCE BETWEEN MILITARY/CIVILIAN PAY RATIOS AND ENLISTED RECRUIT QUALITY AND RETENTION .......................................... 27 C. MILITARY-CIVIL SERVICE PAY ADJUSTMENT LINKAGE: LEGISLATIVE BACKGROUND, 1967-1993 .................... 30 Bibliography .............................................. 33 vii Figures 1. From 1982 to 1992 BPI Rose 11.7 Percent Less than ECI .......... 7 2. From 1982 to 1992 BPI Rose Nearly the Same as DECI .......... 8 3. DECI-Based Pay Gaps for Enlisted Personnel with High School Diplomas, by Gender and Seniority ........................ 10 4. DECI-Based Pay Gaps for Officers with Some College or a Degree, by Gender and Seniority .......................... 11 5. Relative Pay Growth by Broad Occupation Groups ............ 15 6. Since 1982, Pay Gaps Are Larger for Older Age Groups ......... 16 A.1. Pay Gap Similarity Between Three-Way and Five-Way DECIs .... 25 B.1. Male High-Quality Accessions and First- and Second-Term Retention Track the DECI-Based Military/Civilian Pay Ratio ..... 28 ix Summary This report investigates the military/civilian pay gap and its implications for capping military pay increases. The pay gap is defined as the percentag.- difference in military versus civilian pay growth as measured from a given starting point. The index currently used to measure civilian pay growth is the Employment Cost Index (ECI), which reflects pay growth in the civilian labor force at large. We instead recommend measuring civilian pay growth for the subset of civilian workers whose composition by age, education, occupation, gender, and race/ethnicity represents that of active duty military personnel. We do so via the Defense Employment Cost Index (DECI), which we constructed previously and have updated to include fiscal 1992. We compare pay gaps based on the ECI versus the DECI and present DECI-based pay gaps for officer and enlisted personnel by gender and seniority and for occupational and age categories. We then consider the implications of these pay gaps for capping military pay. Ea- and DECI-based pay gaps are similar in the early years of our comparison and reveal a serious gap by the late 1970s. The large military pay increases taking effect in fiscal 1981 and 1982 closed this gap. From fiscal 1992 onward the Ea- and DECI-based pay gaps diverge. The ECI shows an ever-widening pay gap through the 1980s, reaching 11.7 percent by fiscal 1992 from a fiscal 1982 base point-that is, military pay grew 11.7 percent slower than civilian pay as measured by the Ea. However, unlike the situation in the late 1970s, the Services did not experience recruiting and retention problems. As a result, the ECI-based pay gap suggested that military pay had become unimportant to meeting personnel quality and quantity goals. In sharp contrast, the DECI shows essentially no pay gap during the 1980s for young enlisted personnel and a comparatively small pay gap for older enlisted personnel. Further, relative to fiscal 1982, the fiscal 1992 DECI-based pay gap reached only 0.1 percent overall (including officers)--essentially, the relationship of military pay to civilian pay was the same as that in fiscal 1982. Further, recruit quality and retention showed a positive relationship with the DECI-based military/civilian pay gap, suggesting that pay has been a major determinant of that relationship,a point consistent with detailed analyses of enlistment and retention. x Because of the apparent responsiveness of enlisted recruit quality and retention to military pay, the DECI's lesson for pay caps is that while a one-year freeze might do little damage, a sustained slippage amounting to perhaps 9 percent by 1997, as based on the projected civilian growth rate of 14 percent versus the 5 percent proposed rate for military pay over the period, could do real harm. The accession and retention problems of the late 1970s, i.e., before the big military pay hikes in fiscal 1981 and 1982, are the best testament to this. Although the overall pay gap for fiscal 1992 was negligible at 0.1 percent, the DECI reveais how pay gaps varied across groups. During the 1980s, civilian wages relevant to junior enlisted men actually grew slower than military pay, while military and civilian pay grew at about the same rate for senior enlisted men. Civilian pay relevant to officers grew significantly faster than military pay, resulting by fiscal 1992 in a gap of 16.1 percent for junior male officers and 10.9 percent for senior male officers. For women in the military, the rapid wage rate increases achieved by their civilian counterparts during the 1980s had created a 7 percent pay gap for enlisted women by fiscal 1992 and a gap three times that size for female officers. These large negative gaps for officers and women may not necessarily reflect poor absolute pay comparability, since the pay gaps reflect military/civilian pay growth differentials from a base point and not wage levels at that point or currently. It is possible that military pay levels still exceed the pay levels of their civilian counterparts; this can be determined through a separate study. The DECI pay gap estimates indicate that sustained caps on military pay could significantly damage recruitment and retention. To some degree that damage could be mitigated by selectively applied bonuses and supplemental educational benefits for enlisted men and women. We therefore suggest that a program of pay caps, if enacted, be accompanied by the authority and resources to increase the amount and scope of bonuses and benefits rapidly (within a fiscal year). That may require increased appropriations and/or specific authority to shift funds from other accounts for which funds have been appropriated. For officers the situation is less clear. Their retention was virtually unaffected by the pay gaps that opened during the 1980s. Possible explanations for this unresponsiveness include: officers have a long-term career commitment; many junior officers incur obligations to serve a numbtr of years of service and are not at liberty to leave; many senior officers with over 10 years of service are drawn forward by retirement benefits receivable after 20 years of service; officers may have expected their compensation to be restored to comparable civilian levels in a matter of time; and officer pay levels may have been greater than civilian levels, xi though with the rapid growth in civilian pay they are now nearer parity. An added gap resulting from pay caps could affect future officer retention by changing these relationships; therefore the situation should be monitored closely. riii Acknowledgments We would like to thank Captain Mary Humphreys-Sprague (USN), the former Director of the Office of Compensation Policy, Office of the Secretary of Defense, for supporting the original analyses on which this report is based. We are grateful to Saul Pleeter, also at the Office of Compensation Policy, for his valuable comments. We appreciate the contributions of our RAND colleagues Bruce Orvis, who provided a careful and thoughtful review; Beth Asch, who gave us numerous comments along the way; and Deborah Wesley, for helping to update the Defense Employment Cost Index series.