An Economic Analysis of Military Draft Prof. Panu Poutvaara, University of Helsinki

2. An Economic Analysis of Military Draft Prof. Panu Poutvaara, University of Helsinki • Military systems around the world • Two ways to recruit military staff • The true costs of military draft • Empirical analysis on growth effects • Voluntary service and military reserves • Equity and gender equality • Conclusions

3. 1. Military systems around the world Military systems around the world • Conscription throughout the world, 2007. • Green: No armed services • Blue: No conscription • Orange: Plan for conscription to be abolished within 3 years • Red: Conscription • Gray: No information

4. 1. Military systems around the world Military Draft – An Anachronism? • 17 out of 26 NATO states no longer rely on conscription, and two others have decided to phase it out • Western countries with strongest military (the United States, the United Kingdom, France) have abolished draft • Sweden, Finland and Germany among a decreasing number of Western countries still using draft • Draft still used in Russia, China, Israel, and most Latin American and African countries • In Asia, draft is widely used, apart from the Indian peninsula and Japan

5. 2. Two ways to recruit military staff Voluntary system Those serving are hired in the labor market; decision to serve voluntary Salaries paid by ordinary taxation Conscription Forced labor service; those ordered to serve paid typically less than what they would require to serve voluntarily Rulers have historically used forced labor also in other jobs; nowadays democracies no longer recruit other staff by forced service

6. 2. Two ways to recruit military staff • Economists and Conscription: • A key insight: different people are good at different things. This is called comparative advantage • Division of labor allows specialization. This benefits everyone • Economists‘ view on draft has largely been unchanged since Adam Smith: „…the irresistible superiority which a standing army has over every sort of militia.“ (1776, 5.I.1)

7. 2. Two ways to recruit military staff But: The draft is the cheaper system, isn‘t it? In Sweden, draftee serving 11 months earns about 50,000 kr (tax free) The starting salary of a "fänrik" is 16,900 kr per month (including taxes). This means 202,800 kr per year plus social security contribution „…the irresistible superiority which a standing army has over every sort of militia.“

8. 3. The true costs of military draft Opportunity cost = the value of the best alternative that is given up when something is done Budgetary cost ≠ Opportunity cost • Static costs of conscription • The loss of production that a draftee could have generated elsewhere • The non-monetary inconveniences related to draft, as evaluated by draftees

9. 3. The true costs of military draft • Dynamic costs of conscription • Draft or civil service postpones studies and entry into the labor market • With upward-sloping wage profiles, the effect may persist well over ten years • According to a Dutch study, draftees may lose up to 5 percent of their lifetime income • The cost could be especially high for entrepreneurs and those who work in research and development and in jobs in which technological progress is very fast • With a voluntary system, the dynamic costs of draft are allocated to those for whom they are lowest, and they are compensated for this

10. 3. The true costs of military draft • Draft Age: 18 to 25 ys • Without draft: studies, first experiences on job, vocational training • Call to service interrupts education Distorted accumulation of human capital

11. 3. The true costs of military draft • Theoretical model by Lau, Poutvaara, and Wagener (2004): • ”Dynamic Costs of the Draft” • Compares an economy with draft with an identical one without draft • Focus on distorted timing of investments in human capital • No static inefficiencies. Thus, estimates a lower bound of the costs of conscription • Size of effects: with one-year conscription, 50% draftees per cohort, and 25% percent underpayment: GDP in the steady state decreases by up to 1%. • A model without economic growth; excludes long-run growth effects

12. 4. Empirical Analysis Study by Keller, Poutvaara, and Wagener (2006): “Military Draft and Economic Growth in OECD Countries“ • 21 OECD countries • Time period: 1960-2000 • dependent variables: (natural log of) GDP/worker in 2000; growth thereof between 1960 and 2000 • Growth model that includes also investment in human capital • Abolishing draft could increase annual GDP growth between a quarter and half a percentage point in OECD countries.

13. 5. Voluntary service and military reserves • Is draft needed, despite its static and dynamic costs, to • generate military reserves? • - NO! • Voluntary service can be complemented by a reserve • Reservists should be paid a sufficient compensation to motivate them to maintain their skills • Taking into account the opportunity costs of reservists, voluntary reserves can be maintained by a lower total economic cost than non-voluntary reserves, as long as the size of reserves is well beyond 100 percent of the age cohort • In those countries in which only men (or a fraction of men) are drafted, it would be easy to switch to a voluntary system when also women are recruited. See the United States and the United Kingdom

14. 6. Equity and gender equality Inequity of military draft • Military draft hitting only men is a flagrant form of gender discrimination • Even among men, draft is arbitrary: in 2008, out of the cohort of 70,000 young men, only 27,000 will undergo physical and psychological testing determining who will serve • As a tax, this corresponds to randomly allocating a higher tax burden to a subset of young males • In any other area of taxation, allocating tax burden randomly would be viewed as unacceptable

15. 7. Conclusion Lessons: • Military draft and other forms of forced labor might be cheap in budgetary terms, but nevertheless costly for the whole economy • Military draft is replete with static and dynamic inefficiencies • Dynamic costs in the form of postponed human capital formation may also harm economic growth • Male-only conscription is a severe violation of gender equality. Furthermore, conscripting only a fraction of males means even arbitrary allocation of tax burden among men • Better trained and motivated military reserves could be maintained with voluntary service, coupled with paying reservists.

16. 7. Conclusion Lessons: Economics tells: voluntary system allows more cost-effective and equitable recruitment Decisions on the optimal size of the military, as well as what type of weapon systems to use and how to invest in those require expert judgment by military professionals and foreign policy experts, and are finally political decisions.