Can Pay Regulation Kill? Panel Data Evidence on the Effect of Labor Markets and Skills on Hospital Quality and Productivity

Posted: 11 Jun 2007

See all articles by Emma P. Hall

Emma P. Hall

University of Bristol - Leverhulme Centre for Market and Public Organisation (CMPO)

Carol Propper

Imperial College London Business School; Centre for Economic Policy Research (CEPR); University of Bristol - Leverhulme Centre for Market and Public Organisation (CMPO)

John Van Reenen

London School of Economics - Centre for Economic Performance (CEP); Stanford Graduate School of Business; Institute for Fiscal Studies (IFS); Centre for Economic Policy Research (CEPR)

Date Written: 2007

Abstract

Centralized public sector wage setting for public sector workers is widespread. We would expect such regulation to have effects on labor supply and on the productivity of public services in areas with strong local labor markets. In this paper we test this, using the British National Health Service as our test bed. We predict that areas with higher outside wages should suffer from problems of recruiting, retaining and motivating workers and this should harm hospital performance. We construct hospital-level panel data on both quality as measured by death rates (within hospital deaths within thirty days of emergency admission for acute myocardial infarction, AMI) and productivity. We present evidence that stronger local labor markets significantly worsen hospital outcomes in terms of quality and productivity. A 10% increase in the outside wage is associated with a 4% to 8% increase in AMI death rates. We find that an important part of this effect operates through hospitals in high outside wage areas having to rely more on temporary "agency staff" as they are unable to increase (regulated) wages in order to attract permanent employees. We quantify the magnitudes of these "hidden costs" of labour market regulation, which appear to be substantial.

Keywords: hospital quality, hospital productivity, skills, labor markets, wage regulations

JEL Classification: J45, I11

Suggested Citation

Hall, Emma P. and Propper, Carol and Van Reenen, John Michael, Can Pay Regulation Kill? Panel Data Evidence on the Effect of Labor Markets and Skills on Hospital Quality and Productivity (2007). iHEA 2007 6th World Congress: Explorations in Health Economics Paper. Available at SSRN: https://ssrn.com/abstract=992687

Emma P. Hall

University of Bristol - Leverhulme Centre for Market and Public Organisation (CMPO)

12 Priory Road
Bristol BS8 1TN
United Kingdom

Carol Propper (Contact Author)

Imperial College London Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

University of Bristol - Leverhulme Centre for Market and Public Organisation (CMPO) ( email )

12 Priory Road
Bristol BS8 1TN
United Kingdom

HOME PAGE: http://www.bris.ac.uk/Depts/Economics/department/profiles/propper.htm

John Michael Van Reenen

London School of Economics - Centre for Economic Performance (CEP) ( email )

Houghton Street
London WC2A 2AE
United Kingdom
+44 20 7955 6976 (Phone)
+44 20 7955 6848 (Fax)

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Institute for Fiscal Studies (IFS) ( email )

7 Ridgmount Street
London, WC1E 7AE
United Kingdom
+44 20 7240 6740 (Phone)
+44 20 7240 6136 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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