The authors examine the sensitivity of wage setting in two federal pay systems—the General Schedule (GS) system, covering white-collar workers, and the Federal Wage System (FWS), covering blue-collar workers—to local wages and cost-of-living. In 1978 and 1980, the years of the data, FWS wages were designed to reflect local labor market wage levels, while GS wages were intended to be responsive to national wage trends, independent of local wage levels. The authors find that FWS wages were closely tied to local external market conditions, as intended. However, GS wages, both for new hires and for longer-tenure employees, were also responsive to those conditions (though less so than FWS wages). To circumvent policies designed to screen out local labor market effects, GS administrators apparently employed such pactices as assigning new employees to higher grade levels than were formally warranted.
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