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Chapter 4 Military Labor. ECON 335 Frederica Shockley. Troops on Active Duty. Table 4.1 shows the top 25 countries ranked by the number of troops on active duty. Table 4.2 shows the top 25 countries by population. Note that 19 of the top military states listed in Table 4.1 are also in 4.2.
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Chapter 4Military Labor ECON 335 Frederica Shockley
Troops on Active Duty • Table 4.1 shows the top 25 countries ranked by the number of troops on active duty. • Table 4.2 shows the top 25 countries by population. • Note that 19 of the top military states listed in Table 4.1 are also in 4.2. • In general, countries with larger populations also have more troops in military.
Active Troops to Population Ratio • Table 4.3 shows countries ranked by the active troops to population ratio. • Countries that are not among those with the largest militaries or largest population show up in this table. • E.G., Greece & Cyprus, the only 2 European countries on this list, are caught in a centuries long dispute with Turkey over Cyprus. • Security is a major concern of the countries on this list.
Conscription • A form of government mandated obligatory military service, also called the draft. • Russia, with the 5th largest troop size, has conscription. About 700,000 boys are drafted each year in Russia.
All Volunteer Vs. Conscription • In Fig. 4.4 Ld is downward sloping because, all things being equal, government will tend to hire more troops as the wage decreases. • LsAVF is upward sloping because the military looks more attractive than civilian jobs, all things being equal, as the military wage rises. • Ld and LsAVF intersect at the all volunteer army wage of WAFV and an all volunteer force level of LAVF.
The Draft • Ls DRAFT is the size of the draft military as determined by government & this results in a draft wage of WDRAFT (Fig. 4.4). • At WDRAFT there will be LI volunteers. • Ls DRAFT - LI will be draftees.
More Bang for the Buck • The draft allows government to hire more troops for the same cost as an AVF. • Ls DRAFT is drawn so that the cost to government is the same as it is for AVF. • Cost for AVF = area ABCD; • Cost for conscription = GFEC; • Since ABCD = GFEC → military gets more soldiers for same total expenditures.
Capital Vs. Labor • Since draftees are cheaper labor, the draft army will use more labor & less capital than the AVF. • Table 4.2 shows that Germany with conscription has more troops than the United Kingdom with an AVF, but Germany spends less on equipment.
Demand & Supply of Troops • Note that the demand for labor curve in Fig. 4.4 = marginal product (MP) of labor. • MP of labor = the additional security that results when one more troop joins. • MP of labor = MB of additional soldier. • Labor supply curve indicates the willingness to join the military.
Conscription & Opportunity Cost • Since willingness to join < wage, some troops unmotivated. • Low MPL for some troops implies low level of skills. • Conscription is inefficient because it ignores comparative advantage. • Comparative advantage requires that the person with the lowest opportunity cost perform a task.
Elvis Drafted! • In 1958 Elvis was drafted into the Army. • He performed many tasks for the Army valued at a much lower price than the entertainment he provided in the private sector. Source: http://www.militaryimages.net/photopost/data/586/11elvis-army.jpg
Many Draftees Unskilled • While Elvis was “overqualified” for his position, many draftees had low levels of education and skills. • The Army used many more resources training them than they were worth as recruits. • In an AVF the military can set standards for recruits & avoid expensive training.
Non-universal Vs. Universal • Non-universal draft allows exceptions for various circumstances, e.g. education, family status, employment in certain fields, etc. • Universal draft allows exceptions for medical reasons only. • Causes many inefficiencies by taking highly qualified people; • Considered more equitable than non-universal since easier for higher income men to get deferment.
Avoidance Activities • Inefficient since non-universal draft led to avoidance activities: • Earlier marriage & earlier children; • Unnecessary schooling; • Emigration; • More employment in exempted jobs. • Inequitable because easier for higher income men to avoid the draft.
Selective Service Lottery • The lottery, used in 1969 – 1972, implemented to address inequities of non-universal draft. • Someone drew a ball out of a container with 366 balls. • Each ball had a date. • Any eligible male born on the date listed on the first ball was number 1 in the draft. • This continued until there were no more balls in the container, and the result is in Table 4.3. • Transition between draft & AVF.
Vietnam Troops • 75% volunteers, but large percentage draft induced volunteers who joined before draft to avoid army where more likely to tour Vietnam. • 38% of draftees sent to Vietnam. • 25% of troops in Vietnam were draftees.
Vietnam Troops • 30% of troops killed in Vietnam were draftees. • No reservists or national guard called to Vietnam. Source: http://www.vva.org/TheVeteran/2002_09/images/uni_soldier.jpg
From Lottery to AVF • As promised, Nixon ended the draft in 1973. • Impact of transition to AVF: • Military pay increased by 13% in 1971 (Table 4.5) but later pay increases wiped out by inflation. • Number active duty & reservists began declining in 1969 & 1972, respectively, but may be due to Nixon’s decision to quit Vietnam. • Military expenditures on equipment increased but may be due to Reagan’s showdown with the USSR.
Military Pay • Base Pay is determined by rank & years of service (Table 4.7). • Non-taxable housing & food: • Troops receive either A BAH (basic housing allowance) or military housing. • Troops also receive a BAS (basic allowance for subsistence) to pay for chow hall & off-base meals. • Other income: • Hazard duty pay; • Reenlistment bonus; • Extra pay for certain occupations.
Civilian Vs. Military Pay • Problems in comparison: • Military pay more complicated than civilian. • Often difficult to find comparable jobs. • Comparisons between different sets of compensation statistics yield different results.
Rand Study • Enlisted do relative better than high school graduates in private sector. • Officers do not make as much as college graduates in private sector.
In-Kind Compensation • About 60% military pay is in-kind which are payments made with tangible items, not cash. • Fig. 4.8 shows the average troop receives about $56,000 in-kind & about $43,000 cash.
Retirement • Military personnel can retire after 20 years with some as young as 38: • Retirement pay =50% of final pay for rest of life. • Collect nothing if they retire < 20 years. • Incentive to stay in 20 years, but no longer. • Many do not collect because they serve only 1 term. • Private sector employees: • Vested after 5 years; • Cannot usually collect retirement until age 55. • Typically retire at age 65.
Non-Tangible Benefits • Many join military for non-tangible benefits. • Patriotism; • Sense of duty &/or accomplishment; • Feeling of belonging.
Optimal Wage • There is an easy way to determine the optimal wage: if military meets recruitment goals, it is paying the optimal wage.
Private Military Companies (PMC’s) • PMC’s are an alternative to conscription and AVF’s. • PMC’s provide a range of services, e.g.: • Train new Iraqi Army; • Overthrow governments; • Interrogation services; • Combat forces.
First Privatized War • PMC’s grew rapidly during last decade. • In Persian Gulf War (1991) there was about 1 contractor for every 50 to 100 U.S. military personnel. • In Iraq (2003) there are about 1 contractor for every 10 U.S. military personnel. • More than 10,000 contractor personnel make PMC’s the 2nd largest military contingent in Iraq.
Reasons for Growth • Kellog, Brown & Root’s (KBR, a subsidary of Halliburton) success in Kuwait after Persian Gulf War drew attention to profit potential. • In 1990’s military downsized while expanding global operations, creating need for support services. • As weapons become more complicated, private firms needed for maintenance & training. • PMC’s are cost effective.
PMC & Efficiency Wages • Efficiency wage: set above equilibrium in order to induce greater work effort (Fig 4.9). • If firms pay only equilibrium wage, employees have little incentive to work hard since they know they can find another job at about the same pay. • If above equilibrium they have incentive to work hard to keep from getting fired.
War Story • In 1995 the Sierra Leone government hired Executive Outcomes (EO) to help end the civil war. • EO helped coordinate a plan to drive back insurgents. • 22 months & $35 M. • After peace treaty UN sent in peace keeping force. • 8 months & $47 M; • Lost control of Sierra Leone.
Higher Wages But Lower Cost • Highly skilled workers can complete tasks faster. • Higher pay results in lower turnover. • Since PMC’s hire U.S. troops, PMC does not pay for training. • Unlike military, PMC’s are not responsible for personnel for the rest of their lives.
Who Benefits? • Taxpayers pay for training since PMC’s recruit from military personnel. • PMC’s reap rewards of training. Training Cost About $260,000
KeyMacroeconomic Points • There is a strong relationship between the size of a country's population and the size of its military. • Countries with an AVF must spend more per service member than countries with conscription. • Countries can use conscription as a means to reduce government military expenditures.
Key Microeconomic Points • A government's demand for military personnel always exhibits a negative relationship between wages and the quantity of personnel. • The supply of military personnel can show a positive relationship between wages and the quantity of personnel when a country has an all volunteer force (AVF). This result is because, all things being equal, the higher the wages offered by the government for military service, the more citizens will voluntarily join the military
Key Microeconomic Points • The supply of military personnel can show no relationship (vertical line) between wages and the quantity of personnel when a country has a conscripted force. • This result is because the government will mandate that people join the military, regardless of the wages it pays.
Key Microeconomic Points • Conscription is inefficient because it violates comparative advantage. • An AVF induces a country's military to become capital intensive, rather than labor intensive. • Determining the optimal level of military compensation for service members is difficult because many people join the military for non-tangible reasons. • The best way to set the optimal level may be to monitor recruitment and retention of high-quality people.
