Research Brief

In spring 1993, the Clinton Administration proposed a series of caps on military pay increases as part of its overall effort to reduce defense expenditures. These caps would reduce the rate of growth in military pay relative to that of civilian pay by 9 percent from 1994 to 1997. This reduction would come on top of an almost 12 percent gap in wage growth that developed between 1982 and 1992, according to the Employment Cost Index (ECI)—the index currently used in setting military pay increases. Paradoxically, this 12 percent gap was not accompanied by recruiting or retention problems even though it was greater than the wage gap of the late 1970s—a period known for recruiting and retention problems.

Was the 1982–1992 pay gap really 12 percent? If it was, is it advisable to let it grow to 21 percent in 1997? Is military pay no longer important to meeting personnel quality and quantity goals? Or is the ECI no longer a reliable index for measuring pay comparability? Researchers at RAND sought to answer these questions by comparing the ECI with the Defense Employment Cost Index (DECI). The DECI is an alternative index that RAND developed to measure pay comparability for military personnel. The Bureau of Labor Statistics constructed the ECI to measure wage growth in the civilian sector.

The DECI shows essentially no overall pay gap during the 1980s, although it reveals pay gaps for women and officers. (Enlisted men constitute almost 80 percent of all active duty personnel.) Thus, the DECI confirms what past experience and previous studies have already demonstrated—that military pay matters. If a wide pay gap is allowed to develop, recruiting and retention problems will follow.

The Difference Is in the Index

These two indexes produced very different results because the DECI tracks wage growth for civilians who are demographically similar to personnel on active duty. By contrast, the ECI measures wage growth in the civilian sector at large. Compared with the civilian labor force, active duty personnel are younger, are more likely to have completed at least a high school education, have different occupations, are mostly male, and are more likely to be black and less likely to be Hispanic. Civilian wage changes are not the same for every group but can—and do—differ by age, education, occupation, gender, and race or ethnicity. The DECI controls for all these characteristics, but the ECI controls only for occupation.

Figure 1. ECI-Based Relative Pay Growth

NOTE: Relative pay growth = [(BPI − ECI)/BPI] ∞ 100.

Figure 2. DECI-Based Relative Pay Growth

NOTE: Relative pay growth = [(BPI − DECI)/BPI] ∞ 100.

The ECI and DECI have not always produced different results. As Figures 1 and 2 illustrate, both the ECI and DECI revealed a wide gap between military and civilian pay growth rates in the late 1970s and early 1980s. The figures diverge after 1982, when military pay increases restored the military/civilian pay ratio to what it had been in 1972, at the outset of the all-volunteer force.

Pay gaps are comparisons of relative pay growth as measured from a base point rather than comparisons of absolute pay levels. Fiscal 1982 is the base point for the pay gap computation reported here for both the ECI and the DECI. Military pay is tracked by a Basic Pay Index (BPI), and the gap is computed as the percentage difference in the BPI and the ECI or DECI.

Large Pay Gaps for Women and Officers

Although the DECI reveals no overall pay gap in 1992, startling pay gaps appear for women and officers. In large part, these gaps reflect the financial gains women and older, more educated workers made in the civilian workforce in the 1980s. Because of the rapid advance of civilian wages for experienced workers, a gap of 16 percent developed by 1992 for junior male officers, and a gap of about 11 percent developed for senior male officers. By 1992, increases in the wages of civilian women created a 7 percent pay gap for enlisted women and a gap three times that size for female officers.

Although these gaps may not reflect poor absolute pay comparability, they require attention because pay gaps can hurt morale, cohesion, commitment, and quality. Additional studies are needed to determine if absolute pay gaps for women and officers exist. Studies are also needed to gain a clearer picture of what motivates officers to stay in spite of relative pay gaps, and whether officer pay is nearing a threshold below which an exodus of officers might occur.

From 1982 through 1992, growing pay gaps had little effect on officer retention. Several possible explanations for this phenomenon include esprit de corps, long-term career commitment, good retirement benefits, and hopes for restored compensation. Knowing what motivates officers to continue serving will suggest ways to compensate officers if stiff wage caps prove necessary.

Conclusions and Policy Recommendations

DECI-based calculations show that recruit quality and retention rise and fall with the military/civilian pay ratio, demonstrating that pay comparability matters and that the DECI is a more accurate measure of the military/civilian pay ratio than the ECI. In the near term, it may be impossible to substitute the DECI for the ECI in adjusting military pay because of two laws: a 1967 law linking pay adjustments in civil service with pay adjustments in the military, and a 1992 law making ECI the official index for basing civil service pay adjustments. Nevertheless, the results of the DECI-based analysis should be heeded, and caps that would create a wide gap between civilian and military pay should be avoided. Although a one-year pay freeze might do little damage, sustained slippage amounting to perhaps 9 percent by 1997 could do real harm.

If caps must be imposed to meet the demands of the federal budget, the Department of Defense should have the authority and resources to offset the negative effects of caps with bonuses and benefits. Recent RAND research indicates that educational benefits are an especially cost-effective recruiting tool and that reenlistment bonuses improve retention at the end of the first and second terms of service.

Finally, this study cautions that pay gap comparisons cannot substitute for absolute pay comparisons. Easy and inexpensive to perform, pay gap comparisons are incomplete because they focus only on relative growth. Detailed assessments of military and civilian compensation must be done periodically to ensure that military pay and benefits do not lose touch with the civilian sector. This point applies generally, but at the moment seems especially apt for women and officers.

This research brief describes work done in the National Defense Research Institute.

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