Research for Pay elasticity

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The Effect of Compensation on Aviator Retention
November 1, 2006

The Navy has two pays designed to help attract and retain aviation officers: Aviation Career Incentive Pay (ACIP) and Aviation Career Continuation Pay (ACCP). In principle, these tools provide the Navy with the capability to offer compensation to aviators in order to meet its requirements. This study examines the empirical relationship between financial incentives and retention of aviation officers, as well as the relationship between civilian labor market conditions and aviator retention. Our analysis suggests that increases in relative military pay do lead to increases in pilot retention. Responsiveness to compensation is highest for propeller pilots and lowest for helicopter pilots. In contrast, we do not find any statistical evidence of a relationship between pay and Naval Flight Officer retention. We suspect that this is due to the lack of variation in retention over the time period on which we focus, rather than to the absence of a behavioral response. We also observe a negative relationship between civilian labor market conditions and pilot retention. In principle, increases in ACCP can offset the deleterious effect of a healthy civilian airline industry on pilot retention. For Naval Flight Officers, we do not find any statistical evidence of this relationship.

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Why Do Pay Elasticity Estimates Differ?
March 1, 2002
An understanding of the relationship between changes in compensation and changes in reenlistment behavior is crucial to shaping the force. A common measure of this relationship is the pay elasticity of reenlistment, the percentage change in reenlistment associated with a 1-percent increase in pay. The literature on Navy enlisted personnel has produced widely varying estimates of this relationship; with changes in both analytic approach and in the Sailors being studied, the reasons for these differences are unclear. Our analysis suggests that most of the variation in these estimates can be explained by the use of different analytic models. Different specifications yield different estimates that span the range found in previous research. Because each specification uses the same data, these different estimates reflect differences in the degree to which these models attribute differences to pay, not differences in the behavior of enlisted personnel. In contrast, there is little variation in the pay elasticity over time; the only significant changes occur during the drawdown. We choose a preferred specification by examining its ability to accurately predict reenlistment behavior. For both in-sample and out-of-sample predictions of reenlistment, our baseline model, with a pay elasticity of 1.5, provides the best fit of the data.
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