Labor market regulation can have harmful unintended consequences. In many markets, especially for public sector workers, pay is regulated to be the same for workers across heterogeneous 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 geographies. 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.
Department of Economics, University of Bristol
Date & time:
10 Dec 2007 16:00 pm - 10 Dec 2007 00:00 am
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