CHAPTER 14 • Markets for Factor Inputs 545 EX AMPLE 14 PAY IN THE MILITARY The U.S Army had a personnel problem for many years During the Civil War, roughly 90 percent of the armed forces were unskilled workers involved in ground combat Since then, the nature of warfare has evolved Ground combat forces now make up less than 20 percent of the armed forces Meanwhile, in the latter half of the 20th century, changes in technology led to shortages in skilled technicians, trained pilots, computer analysts, mechanics, and others needed to operate sophisticated military equipment How did the military respond to this shortage? Economics provides some answers The military pays officers primarily based on years of service Consequently, officers with differing skill levels and abilities were usually paid similar salaries Moreover, some skilled officers were substantially underpaid relative to salaries they could receive in the private sector Figure 14.13 shows the inefficiency that resulted from this pay policy The equilibrium wage rate w* is the wage that equates the demand for labor to the supply With an inflexible wage structure, the military paid a wage w0, which is below the equilibrium wage At w0, the quantity of labor demanded is greater than the quantity supplied, and there is a shortage of skilled workers Over the past decade the military changed its wage structure to maintain an effective fighting force First, a 2.7 percent pay raise went into effect in 2007, followed by a 3.9-percent raise in 2009 and a 3.4-percent raise in 2010 Even so, military pay remains low: As of 2011, a private first-class earned $20,470, a sergeant $24,736, a captain $43,927, and a major $49,964.4 However, the military went a step further, increasing the number and size of its reenlistment bonuses Selective reenlistment bonuses were targeted at skilled jobs where there were shortages The military also took advantage of the sustained high unemployment rates in the United States from 2008 to 2011 by emphasizing the substantial technical training that it provided, along with free or subsidized housing, food, medical care, and education The result of these policies was to move the market for skilled labor in the military back toward the equilibrium market-clear wage w* depicted in Figure 14.13 Wage SL F IGURE 14.13 THE SHORTAGE OF SKILLED MILITARY PERSONNEL w* When the wage w* is paid to military personnel, the labor market is in equilibrium When the wage is kept below w*, at w0, there is a shortage of personnel because the quantity of labor demanded is greater than the quantity supplied w0 Shortage DL = MRPL Number of skilled workers http://militarypay.defense.gov/pay