Bad Idea: Paying Servicemembers More to Do the Same Amount of Work →

From CSIS's Bad Ideas in National Security Series:

Because military pay is tied to the ECI, civilian wage increases drive commensurate increases in military pay. This helps retain an all-volunteer force that may be more inclined to leave military service if civilian wages were to increase at a faster rate. But, real increases in civilian pay reflect productivity growth. If the military matches those wage increases without commensurate increases in military productivity, we end up paying more each year for the same amount of output.

2021 Military Pay Table

Unless Congress or the President intervenes, the annual increase in basic pay for military members is adjusted according to 37 USC 1009. The increase is based on the 12 month percent change in private industry wages and salaries as reported in the September report in the "year before the preceding year" in which the pay raise takes effect. In other words, the pay raise to take effect on January 1, 2020 is based on the September 2018 ECI report.

Congress implemented this automatic adjustment to ensure that military salaries grow in tandem with private industry wages. However, the lag between the measurement of changes in private industry wages and the reflection of that change in military wages is substantial.

Since the Bureau of Labor and Statistics recently released the September 2019 ECI report showing a 3.0 percent increase in private industry wages, it is possible to calculate the 2021 pay table despite the fact that Congress has yet to pass the 2020 NDAA (as of 11/9/19). Presuming the 2020 table reflects the 3.1 percent increase called for in the September 2018 ECI report, the 2021 table will be as follows unless either Congress or the President overrides the law.

View fullsize

2021 Basic Military Pay table at 3.0 percent above 2020 rates
*note O-7 — O-10 pay may be capped

DoD may be sick with Baumol's Cost Disease

I've had this post written as a draft for some time, but given the sad news that William Baumol has passed away, I thought it would be appropriate to post it today.

Baumol's cost disease occurs when sectors with low productivity are forced to raise wages. The Economist succinctly explains the repercussions:

Employers in such sectors face a problem: they also need to increase their wages so workers don’t defect. The result is that, although output per worker rises only slowly or not at all, wages go up as fast as they do in the rest of the economy. As the costs of production in stagnant sectors rise, firms are forced to raise prices. These increases are faster than those in sectors where productivity is improving, and faster than inflation (which blends together all the prices in the economy). So prices of goods from stagnant sectors must rise in real terms. Hence “cost disease”.

The Wall St. Journal had an article arguing that gains in productivity are more difficult in the services sector. This makes services more prone to cost disease. How susceptible is the military to this concern?

The Defense Department faces pressure to keep military salaries, which are based on experience and rank rather than achievement, comparable to civilian wages. And, while factors influencing military productivity have been studied in the past, more research is necessary to fully understand whether overall productivity is increasing in line with other sectors.

Some military innovations have led to increases in productivity. Examples include precision weapons, GPS, remotely piloted aircraft, operational support contracting, and online services. These savings are partially reflected in the decline in military endstrength. Nevertheless, the military is heavily reliant on manpower -- boots on the ground is a common measure of engagement -- to provide national security. And, the services are requesting increases in personnel to support perceived mission requirements.

Given that the cost of military personnel consumes over a third of the defense budget and that the department spends over $10 billion annually on recruiting and initial training, DoD should be aware of the impact that cost disease has on wages and attempt to link salaries to productivity to a greater extent by defining and measuring worker output.