Will Locality Pay Solve Recruitment and Retention Problems in the Federal Civil Service?

Abstract

Do differences in the competitiveness of local labor markets affect the government's ability to recruit and retain federal workers? The Federal Employee Pay Comparability Act of 1990 (FEPCA) assumes that they do. FEPCA replaces a uniform national salary schedule for white-collar workers with a system of locality pay, which will remunerate the same work more highly in San Francisco than in Santa Fe. In this article, we use a 1 percent sample of federal personnel records for 1985 through 1989 to test several hypotheses about the relationship of local labor market conditions to federal recruitment and retention patterns. After a brief discussion of the mechanics and logic of locality pay, we examine interarea differences in federal turnover rates, entry levels, promotion chances, and grade levels. The 1990 Locality Pay Plan FEPCA committed the government to closing the federal-nonfederal pay gap within 13 years, rapidly raising pay in high labor cost areas, and offering special recruitment and retention bonuses in high-demand occupations. Federal salaries have fallen steadily further behind private sector salaries for the past decade, dropping from 3 percent behind in 1978 to 25 percent in 1990 (U.S. General Accounting Office, 1990). The single nationwide pay schedule may have worsened recruitment and retention problems in highly competitive labor markets, putting pressure on the civil service to raise salaries in those areas. In fact, 11 percent of all federal white-collar employees were receiving pay supplements or special pay rates in response to retention or recruitment problems by 1989 (U.S. Office of Personnel Management, 1989; 92-93, 315), and several agencies had attempted to evade General Schedule (GS) pay restrictions(1) (U.S. Congress, 1989b; 3). In the short run, FEPCA gave the President immediate authority to raise salaries 8 percent in areas facing the most serious recruitment problems, and within weeks of its passage President Bush granted that pay increase to federal employees in New York, Los Angeles, and San Francisco (Priest, 1990). This action matched recommendations made by the Wyatt Company, which OPM had hired to study locality pay, but Wyatt had also proposed similar increases for Washington, D.C., and Boston. Indeed, critics charged that the $700 million price tag was the only reason Washington employees were not granted the increase (Balz, 1990; Jenkins and Brown, 1990). In the longer run, the U.S. Bureau of Labor Statistics (BLS) will conduct area surveys on state and local government and private sector salaries for occupations common to a variety of industries. BLS is currently surveying the 24 Primary Metropolitan Statistical Areas (PMSAs) and 4 consolidated MSAs (which include 8 PMSAs) that have the most federal employees. It may survey additional areas in the future (Hearne, 1992). Under FEPCA, differences between average federal and nonfederal pay for comparable positions will be aggregated across occupations and grade levels to generate a single percentage pay disparity between typical federal and nonfederal pay in each locality pay area. FEPCA calls for all federal white-collar employees to receive annual pay increases one-half percent below increases in the employment cost index (ECI). In any of the surveyed MSAs where the federal-nonfederal pay disparity exceeded 5 percent, general service (GS) workers would receive additional salary increases intended to eliminate one-fifth of that disparity in 1994. In the following eight years, locality pay adjustments would continue to narrow federal-nonfederal gaps by 10 percent per year. Employees who moved would not take their old pay adjustments with them; instead, they would receive the GS rate of pay plus any locality adjustment effective for their new location. Testing the Logic Underlying Locality Pay The argument for locality pay rests primarily on the logic of the labor market: the federal civil service is one of many employers competing for the labor of a multitude of economically rational individuals. …