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

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  • Emma Hall
  • Carol Propper
  • John Van Reenen

Abstract

Labor market regulation can have harmful unintended consequences. In many markets, especially for public sector 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 service provision in areas with stronger labor markets. In this paper we exploit panel data from the population of English acute hospitals where pay for medical staff is almost flat across the country. We predict that areas with higher outside wages should suffer from problems of recruiting, retaining and motivating high quality 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. By contrast, we find no systematic role for an effect of outside wages of performance when we run placebo experiments in 42 other service sectors (including nursing homes) where pay is unregulated.

Suggested Citation

  • Emma Hall & Carol Propper & John Van Reenen, 2008. "Can Pay Regulation Kill? Panel Data Evidence on the Effect of Labor Markets on Hospital Performance," CEP Discussion Papers dp0843, Centre for Economic Performance, LSE.
  • Handle: RePEc:cep:cepdps:dp0843
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    More about this item

    Keywords

    labor market regulation; hospital quality; hospital productivity; skills;

    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; Fragmentation
    • 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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