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MILITARYPAYPOLICYANDTHEEFFECTSONAIRFORCEREENLISTMENT By SCOTTE.CARRELL ADISSERTATIONPRESENTEDTOTHEGRADUATESCHOOL OFTHEUNIVERSITYOFFLORIDAINPARTIALFULFILLMENT OFTHEREQUIREMENTSFORTHEDEGREEOF DOCTOROFPHILOSOPHY UNIVERSITYOFFLORIDA 2003 ACKNOWLEDGMENTS Iwouldliketothankmyadvisor,DavidFiglio,andcommitteemembersDavid Denslow,LawrenceKenny,andRobertEmersonfortheirguidanceandsupport throughoutthisendeavor. IwouldalsoliketothankJimDewey,ChunrongAi,Walter Beckert,JaniceHauge,JustinRamey,InigoArroniz,KevinChristensen,ColinKnapp, CapriceKnapp,ScottHankins,MarkHoekstra,andBurcinUnel,fortheirassistance, comments,andsuggestions. Additionally,IappreciatetheassistanceoftheOfficeofthe SecretaryofDefense,EntitlementsandCompensations,BureauofEconomicand BusinessResearchfortheirgeneroussupportinthedatacollectionprocess. Finally,I wouldliketothankmywife,Susie,forallofhersupportthroughouttheentireprocess. n 1 TABLEOFCONTENTS Page ACKNOWLEDGMENTS ii LISTOFTABLES LISTOFFIGURES vii ABSTRACT viii CHAPTER INTRODUCTION 1 1 2 EMPIRICALANALYSISOFTHEDEPARTMENTOFDEFENSEMILITARY HOUSINGALLOWANCEPROGRAM 3 PoliticalPartiesandDistributivePolitics 5 HousingAllowanceSystem 8 ScopeandData 1 DependentVariable 11 ExplanatoryVariables 13 MethodsandResults 16 ChangeinAllowanceAnalysis 16 YearlyAllowanceAnalysis 21 Post-PolicyAnalysis 27 Conclusions 28 3 LOCALLABORMARKETEFFECTSONAIRFORCEREENLISTMENTS 35 MilitaryWageTheory,CompensatingWageDifferentials,andRetention 38 MilitaryWageTheory 38 CompensatingWageDifferentials 40 MilitaryRetention.... 40 AirForceReenlistment 41 Data 43 MethodsandResults 47 PriceLevelandAmenityAffectsonWages 48 MilitaryLaborMarket:Nationalvs.Local 49 LocalWageEffectsonReenlistment 54 ConsequencesofMilitaryWageDisequilibria 59 Conclusions 63 iii 1 4 OPTIMALCOMPENSATINGWAGEFORMILITARYPERSONNEL 7 Introduction 71 CurrentMilitaryWageStructure 72 ProposedWageStructure 78 ReenlistmentSimulationsofProposedWageStructure 83 TheArmy’sTSRBProgram 85 Conclusions 88 5 CONCLUSIONS 96 APPENDIX A SUMMARYSTATISTICS 98 B PRE-TRUNCATIONDATAEXAMPLES 100 C PROBITANDLINEARCOMPARISON 101 D CONDITIONALFIXEDEFFECTSLOGISTICMODELRESULTS 102 E AIRFORCEBASELOCATIONS 103 LISTOFREFERENCES 105 BIOGRAPHICALSKETCH 108 IV LISTOFTABLES Table page 2-1.Totalchangeinallowances,regressionresults,1996-2001,rankE-4 30 2- 32--2.Changeinhousingallowancepolicyeffects 31 2-3. Post-policydifferentialeffects 32 2-4. Post-policyDemocraticeffect 33 5. Post-policychangeinallowances,2001-2002,rankE-4 34 1.AirForceCONUStime-on-stationStatistics(TOS),enlistedpersonnel,April2002....65 3-2.AirForcereenlistmentstatistics 65 3-3.ReenlistmentstatisticsbyAFSC2-digit,1996-2001 66 3-4.Regressionresults,localwagesonpricelevelandamenity 67 3- 43--5.Regressionresults: localwagesonpricelevelandamenity(subset) 67 3-6.Probabilityofreenlistment,probitmarginaleffects,nationalandlocalwage specifications 68 3-7.ProbabilityofReenlistment,probitmarginaleffects,nationalandlocalwage specifications(subset) 68 3-8.Probabilityofreenlistment,regressionresults,locallabormarketeffects 68 3-9.Probabilityofreenlistment,regressionresults,locallabormarketeffects(subset) 69 3-10.Probabilityofreenlistmenteligibility,locallabormarketeffects 70 11.Eligibilityeffectswitha1-standarddeviationincreaseintheexplanatoryvariable....70 1.HomeofrecordlocationsandCONUSassignments 90 4-2.Civilianandmilitarypopulation 90 4-3.Civilianandmilitarywageindexes 92 4-4.Proposedwages(monthlyaverage,1996-2001) 93 v 4-5.Standarddeviationformilitarytocivilianwagedifference,alloccupations 93 4-6.Proposedwagesimulation,alloccupationsbybase 94 4-7.Proposedwagesimulation,selectedoccupations 95 A-l.Chapter2summarystatistics 98 A-2.Chapter3summarystatistics 99 B-l.Pre-truncationdataexamples 100 C-l.Probitandlinearmodelcomparison 101 D-l.Conditionalfixedeffectslogisticmodelresults 102 E-l.AirForcebaselocations 103 vi LISTOFFIGURES Figure page 4-1.Inefficiencyforlocationswithoutenoughvolunteers 76 4-2.Inefficiencyforlocationswithtoomanyvolunteers 77 vii AbstractofDissertationPresentedtotheGraduateSchool oftheUniversityofFloridainPartialFulfillmentofthe RequirementsfortheDegreeofDoctorofPhilosophy MILITARYPAYPOLICYANDTHEEFFECTSONAIRFORCEREENLISTMENT By ScottE.Carrell May2003 Chairman: DavidFiglio MajorDepartment: Economics Thisdissertationanalyzesmilitarypayandretention. Thestudyexploresthe distributiveeffectsfroma1998policy,whichchangedthemethodologyforcomputing militaryhousingallowances. Additionally,thestudyanalyzesthelocallabormarket wageeffectsonAirForcefirst-termreenlistments. Finally,analternativewagestructure isproposedtoreplacethehousingallowancesystem. First,thestudyanalyzestheeffectsofthe1998policychangeincomputing militaryhousingallowancestodetermineifthepolicymetDepartmentofDefense’s (DoD)goalofcreatingequity. Resultsshowthathousingallowancesincreasedinmost locationsandranks,butsignificantdifferentialpolicyeffectswereevident.Someofthese effectswereexpected. However,increasedallowancesinlocationsvotingDemocraticin the1996presidentialelectioncannotbereasonablyattributedtotheDoD’sgoals. Estimatesforallowanceincreasesassociatedwitha1standarddeviationincreasefrom themeaninthe%Democraticvoterangedfrom0.99%to3.42%. Next,thestudycomparesthedifferencesinmilitaryandcivilianwagesacross locationsandestimatesthesedifferentialeffectsonAirForcereenlistments. Results showthatmilitarywagesarenotinequilibriumwithlocalcivilianlabormarkets. The cost-of-livingelasticityofmilitarywagesissignificantlylessthanthatforcivilianwages; viii andmilitarywagesarenotadjustedforlocationamenities. Theresultisaninequitable distributionofmilitarywagesacrosslocations. Thisinequitywasshowntosignificantly affectthereenlistmentdecisionofAirForcefirst-termpersonnelfrom1996-2001. Finally,thestudyproposesanalternativewagestructuretoreplacethecurrent system. Analysisshowsthatthecurrentsystemleadstoproductioninefficienciescaused byshort-termmanningshortagesinexcessivelyhigh-turnoverlocations. Additionally, becausewagesarenotsetatthelevelrequiredtoinduceenoughvolunteerstoservein eachlocation,thetotalopportunitycostforpersonnelservingisnotminimized. The solutionistosetmilitarywagesaccordingtothelocalciviliancompensatingwage differentials. Wagessetaccordinglywouldresultinamorestabilizedforce,by equalizingtheopportunitycostsateachlocation. Simulationsshowthattheproposed wagestructurewouldbetterequalizereenlistmentratesacrosslocations,andthiscouldbe atnocosttothegovernment. IX CHAPTER 1 INTRODUCTION Militarypayandcompensationisanessentialelementtomaintaininganeffective andefficientfightingforcefortheUnitedStates. Numerouspolicieshavebeen implementedoverthepastdecadetoimprovecompensationforournations’military personnel. Specificallychangeshavebeenmadeinattempttocreateequityofwages acrossgeographiclocationsaswellasimprovethecompetitivenessofmilitarytocivilian wages. Thisstudyexploresthedistributiveeffectsfroma1998policy,whichchanged themethodologyforcomputingmilitaryhousingallowances. Additionally,thestudy analyzesthelocallabormarketwageeffectsonAirForcefirst-termreenlistments. Finally,analternativewagestructureisproposedtoreplacethehousingallowance system. First,Ianalyzetheeffectsofthe1998policychangeincomputingmilitary housingallowancestodetermineifthepolicymetDepartmentofDefense’s(DoD)goal ofcreatingequity. Ialsoexaminewhetherapoliticalbiasassociatedwiththe implementationofthisgovernmentprogramisevidentinthedistributionofallowances. Allowancesareexaminedaccordingto1996presidentialelectionresultstotestthis hypothesis. Next,thestudycomparesthedifferencesinmilitaryandcivilianwagesacross locationstodetermineiflocallabormarketsplayasignificantroleinthereenlistment decision. First-termreenlistmentsfortheAirForcefromFY96throughFY01are analyzedbyoccupationandlocation. Resultsshowthatmilitarywages,whencompared 1