بازار ملی داخلی کار در مواجهه با بازار کار محلی: اثرات 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.

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.