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Can Pay Regulation Kill? Panel Data Evidence on the Effect of Labor Markets on Hospital Performance

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Author Info
Emma Hall
Carol Propper
John Van Reenen

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Abstract

Labor market regulation can have harmful unintended consequences. In many markets, especially for publicsector workers, pay is regulated to be the same for individuals across heterogeneous geographical labor markets.We would predict that this will mean labor supply problems and potential falls in the quality of serviceprovision in areas with stronger labor markets. In this paper we exploit panel data from the population ofEnglish acute hospitals where pay for medical staff is almost flat across the country. We predict that areas withhigher outside wages should suffer from problems of recruiting, retaining and motivating high quality workersand this should harm hospital performance. We construct hospital-level panel data on both quality - as measuredby death rates (within hospital deaths within thirty days of emergency admission for acute myocardialinfarction, AMI) - and productivity. We present evidence that stronger local labor markets significantly worsenhospital outcomes in terms of quality and productivity. A 10% increase in the outside wage is associated with a4% to 8% increase in AMI death rates. We find that an important part of this effect operates through hospitals inhigh 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. By contrast, we find no systematic role for an effectof outside wages of performance when we run placebo experiments in 42 other service sectors (includingnursing homes) where pay is unregulated.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0843.

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Date of creation: Jan 2008
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Handle: RePEc:cep:cepdps:dp0843

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Related research
Keywords: labor market regulation; hospital quality; hospital productivity; skills;

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Find related papers by JEL classification:
J45 - Labor and Demographic Economics - - Particular Labor Markets - - - Public Sector Labor Markets
F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies
I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Stratford Douglas & Thomas A. Garrett & Russell M. Rhine, 2009. "Disallowances and overcapitalization in the U.S. electric utility industry," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 23-32. [Downloadable!]
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