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Recent pay increases in the aerospace industry have prompted the Air Force to call for measures that limit their growth and thus avoid the payment of "unreasonable" labor charges. Industry executives and labor unions that represent aerospace workers appealed to the Congress to prevent what they viewed as the Air Force's unnecessary "wage control program." This report is intended to provide the Congress with an analytical basis for assessing the Air Force's concerns. The study was prepared at the request of the Subcommittee on Investigations of the House Committee on Armed Services. In keeping with the Congressional Budget Office's mandate to provide objective and nonpartisan information, the report contains no recommendations.

This report was prepared by Lawrence R. Forest, formerly of CBO, and Marvin M. Smith of CBO's National Security Division under the general supervision of Robert F. Hale and Neil M. Singer. The authors gratefully acknowledge the special assistance provided by Stephanie Martin and J. Edward Shephard. The report benefited from the comments of Bruce Vavrichek. Francis Pierce edited the paper.
 

September 1984
 

INTRODUCTION AND SUMMARY

TRENDS IN THE COMPENSATION OF AEROSPACE WORKERS

ADJUSTING PAY FOR WORKER CHARACTERISTICS

EXPLANATION OF INDUSTRY DIFFERENTIAL

RECENT CONTRACTS

IMPLICATIONS FOR MANAGEMENT

APPENDIX: CPS DATA AND ITS USE IN EXPLAINING EARNINGS
 

Alarmed by recent rises in aerospace pay, the Air Force last year began encouraging Boeing, Lockheed, McDonnell Douglas, and other contractors to limit growth in labor costs to no more than the economywide wage gains foreseen by the Administration--about 5 to 6 percent annually during 1984-1986.¹ This "jawboning," which began just as the industry was negotiating the major three-year union contracts now in force, disturbed several industry executives and union leaders who saw it as an intrusion into sensitive, private business dealings. The International Association of Machinists, which along with the United Auto Workers represents many aerospace production workers, wrote to the Congress protesting what it called the Air Force's "wage control program."² The Air Force, on the other hand, contended that its program merely implemented existing procurement regulations, which preclude payment of "unreasonable" labor charges. In this context, unreasonable means "exceeding costs charged by other similar firms."

To help the Congress judge the basis for the Air Force's concerns, the Congressional Budget Office (CBO) has compared the compensation of aerospace workers with that of workers in other industries. A naive comparison shows that the average employee within the aerospace industry receives about 34 percent more in total annual compensation than the average employee in manufacturing and 75 percent more than the average employee in the overall economy. Much of this high pay, however, simply reflects the observed skills and training of aerospace workers, who rank above average in educational attainment, occupational status, and work experience. But after adjusting for these and other observed characteristics, aerospace wages are still 21 percent higher than those of average workers in the economy and 12 percent higher than average workers in manufacturing.

What accounts for this unexplained differential paid to aerospace workers? It could stem from limited competition or other factors in the industry, that enable the companies to pay higher-than-average wages and salaries. Data in this study do not allow firm conclusions about the lack of competition. It could also result from important characteristics of workers or jobs that could not be identified quantitatively in this study. For example, the aerospace pay differential may reflect efforts to reduce costly turnover among workers who have special skills not reflected by their observed characteristics, such as formal education.

The size of the unexplained pay differential, along with the varied explanations for that differential, may suggest the need for continued but cautious scrutiny of aerospace wages. That scrutiny should recognize that some factors like work experience and education account for higher wages in aerospace but that other factors like limited competition could also lead to high pay.

This report begins with a review of historical data comparing earnings in the aerospace industry with those in the economy as a whole and those in manufacturing. A second section adjusts recent earnings data for worker characteristics such as work experience and education, thereby helping to isolate the differential associated with employment in the aerospace industry. A third section discusses possible explanations for the industry differential, while the final section considers the implications of these findings for management of the defense aerospace industry. An appendix describes the data and methods used in estimating the value of different worker characteristics.

This document is available in its entirety in PDF.

1. Secretary of the Air Force Orr summarized his concerns in the November 1982 Air Force Magazine as follows: "...today I worry that the defense industry is in a position similar to the automobile industry of about forty years ago. Once again, labor is making strenuous demands far in excess of the cost of living. They are asking for increases between eighteen and twenty percent while the cost of living has been running around seven percent.... I offer those of you in the industry just a warning that the Air Force is starting to take a very, very hard look at overhead, at blue and white collar wages, and at all of the things that go into the cost of a product. It is not our business to tell you how much to pay your employees. But it is our business to tell you how much the government feels it can afford to pay for your products." See "On Alert for Overpricing," Air Force Magazine (November 1982), pp. 121-25.

2. International Association of Machinists Position Paper on the U.S. Air Force Wage Control Program, processed, 1983.