Risk premiums and optimal combat-force levels in an all-volunteer army

Abstract

Using a straight-forward and intuitive model of individual risk-wealth tradeoffs, we posit a labour market where a firm's total wage bill declines as it increases employment. Using value of statistical life estimates from Viscusi and Aldy (2003) and Mrozek and Taylor (2002), we analyze the market for security personnel in Iraq for both the US military and a private contractor. We conclude that the US military's marginal cost of labour is about $8000 less than the wage and that the marginal cost for the private contractor may actually be negative.

Acknowledgements

The author would like to thank William C. Wood and David D. Friedman for helpful comments on an earlier draft of this article. He also confirms that, they are not responsible for any errors or other problems with the article.

Notes

¹ http://www.goarmy.com/hslda/index.jsp

²Casualties from http://icasualties.org/oif/default.aspx

³The GFIC estimate comes from the web site: http://www.globalsecurity.org/military/ops/iraq_orbat_es.htm

⁴The number of fatalities comes from the web site: http://icasualties.org/oif/ and was collected on 8 March 2006.

⁵The total serving in the army and marines comes from Table 501 of The Statistical Abstract of the United States, 2006.

⁶Stan Holloway, president of the Professional Services Council (a trade group), is quoted, in 2004, as saying that members of the council had about 25000–30000 employees in Iraq and that they had suffered 50–75 casualties in the first year. While, it is not clear which fraction of the council's employees in Iraq provide security services, the fatality rate is nearly identical to that calculated for GFIC (Gerin, 2004).

⁷Statistical Abstract of the United States, 2006, Table 632.

⁸The 2006 basic pay for a private first class with less than 2 years experience is $18014 per year. Basic pay for a corporal with 4years experience is $23230 per year. Data are from the GoArmy.com website.

⁹In 2003, the average payroll expenditure for active duty military was $43524 (Statistical Abstract of the United States, 2006, Table 496).

¹⁰I would like to thank David D. Friedman for this point concerning the enforceability of contracts.