If you were writing an economists’ manifesto, regional payscales would be one of the few items on which most agreed. The principle is pretty simple: why should a teacher be paid a king’s ransom in Southport, but starved in Southwark.
Part of the principle of this idea is that it is difficult to recruit in areas of high “outside” wages, if you have a national pay-scale. Conversely, the theory goes, when the state “overpays”, it can price out local enterprise.
Some economists from the Centre for Economic Performance at the LSE found a scary natural experiment to test this idea: survival rates from heart attacks.
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 per cent 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.