مواجهه بازار ملی کار داخلی با بازار کار محلی: تاثیر بر حفظ کارکنان

Formal salary systems are commonplace among medium to large-sized firms and within the United States government. However, there is little evidence regarding the costs, if any, of such systems. This study analyzes the effects on retention within the United States Air Force from an inflexible wage system failing to adequately compensate personnel for local compensating wage differentials. Using location-specific Air Force personnel records, I compare the differences between military and civilian wages, by occupation, across locations to determine if local labor markets play a significant role in the stay or leave decisions for personnel. Results show that rigid wage constraints do in fact impose costs on the firm through increased turnover in locations that fail to adequately adjust wages for the cost of living and amenities.

Although formal salary systems are commonplace among medium to large-sized firms and within governments, there is little evidence regarding the costs, if any, of such systems. In fact, in studying internal labor markets, economists are unsure “whether personnel policies have real effects, or are just a veil through which the pressures of the external labor market act relatively unimpeded” (Gibbs and Hendricks, 2004). Economic theory would suggest that rigid pays systems are likely inefficient because salaries are determined by the position versus the individual characteristics of the employee. Such a system would likely underpay high performers and overpay low performers. As evidence, Baker et al. (1994a) found that those who are promoted the fastest also exit more often. Additionally, large corporations and government organizations with employees in multiple locations, may fail to compensate individuals adequately for the cost of living and amenities of the location due to the rigidity of the pay system. The U.S. Department of Defense is one such organization, which employs personnel in locations around the world and has a historically inflexible wage system. Economists have long pointed out that the military pay table does not adequately distinguish among occupational subgroups within the services (Rosen, 1992, Asch and Warner, 2001 and Asch, 1993). This incomplete pay distinction results in specific occupational shortfalls and surpluses, resulting in inefficiencies in the military labor market (Rosen, 1992). Additionally, one could argue that military wages are also out of line with local labor market wages. With the exception of housing allowances, military wages do not vary across locations within the United States.2 However, the theory of compensating wage differentials predicts that wages adjust according to the cost of living and amenities of a location (Rosen, 1979, Haurin, 1980, Roback, 1982, Blomquist et al., 1988 and Graves et al., 1999). Other evidence suggests that wages are adjusted to fully compensate workers for the cost of living in a location (Aggarwal and Kenny, 1996 and Kenny and Denslow, 1980). This leads one to ask whether the retention of military personnel is significantly affected by the rigid pay structure, which fails to fully adjust wages for the local labor market where personnel are assigned. That is, are personnel more likely to exit the military when local civilian wages are relatively higher than military wages (or more likely to stay when civilian wages are relatively lower) at the location of assignment? To determine if external local labor market pressures significantly affect employee retention, this study analyzes personnel records for 95,000+ first-term U.S. Air Force personnel across 67 locations from 1996 through 2001. Results show evidence of the costs associated with a rules-based compensation system, which fails to fully adjust wages for local labor market conditions. Retention is significantly lower in locations in which military wages are less competitive with local civilian wages after controlling for all occupational differences at the national level.

This study analyzed the effects on turnover from an inflexible wage system failing to adequately compensate personnel for local labor market conditions. Although formal salary systems, with rule-based compensation, likely have benefits such as reduced administrative costs, increased perception of equity, and reduced favoritism, this study provides evidence that rigid wage constraints do in fact impose costs on the firm through increased turnover in locations that fail to properly adjust wages for local compensating wage differentials. Military wages are not in equilibrium with local civilian labor markets. The cost of living elasticity of military wages is significantly less than civilian wages and military wages are not adjusted for location amenities. Employee retention is significantly higher in locations where military wages are more competitive with the civilian labor market after controlling for occupational wage variation at the national level and when controlling for wage variation across locations. Additionally, the magnitude of the effects found in this study may be a lower bound to those that actually exist within other government and civilian sectors with rigid pay structures. Military members expect to move to different geographic locations throughout their career; therefore, some members may view a lower than market current wage as only temporary. This study provides evidence that large firms and governmental organizations with rigid wage policies likely have unintended consequences through increased turnover. Some organizations have recognized this potential cost and systematically adjust wages for the cost of living and amenities at each location. For example, the state of Florida adjusts local pay for teachers using a price level index (Florida DOE, 2006). Carrell and West (2005) detail a proposal for the U.S. Department of Defense, which adjusts the rules-based wages by a location wage index. Doing so enables the firm to maintain the benefits of the rules-based compensation system, but provides a market-based mechanism to adjust wages across locations.