Undercover Economist

Cost of living

My family’s experience of the local hospital has been mixed. Sometimes it is impressive; at others it falls below the standard one would expect in the capital of a developed country. Our rule of thumb is that it’s much safer to get sick in Cumbria, where my wife’s parents live.

Although we have had our fair share of dashes to Accident and Emergency, they have been not been so frequent as to constitute a statistically rigorous study of the local facilities. Still, such studies do exist, and one recently published investigation suggests that patients in London have indeed been suffering unduly.

The reason is that many skilled workers in London have decided they have better things to do than work for the National Health Service: in the private sector they can expect to earn 50 or 60 per cent more in London than further north; in the NHS, wages for London staff are relatively meagre. As a result, hospitals in booming areas such as London have more staff vacancies, seem to over-promote staff as a way of giving them more competitive pay, and use more temporary staff hired through private agencies.

It has always seemed obvious to economists that national pay scales are an oddity. It may appear fair to pay nurses, lecturers or teachers much the same in Chelsea as in Chesterfield. Yet since we cannot eat money, it is silly to compare a Chelsea salary with a Chesterfield one without considering what each might buy, and what alternatives might be on offer.

Still, just because a pay arrangement offends against the principles espoused in economic textbooks does not mean that it is a problem in practice. It is not easy to prove that the theoretical concern is a practical problem, but the researchers have convincingly done so using data from 1996-2001: nationally regulated pay was, at the time, killing National Health Service patients in high-wage areas.

The researchers – they are Emma Hall and Carol Propper of the University of Bristol, along with John Van Reenen of LSE’s Centre for Economic Performance – used as their benchmark the proportion of patients who dropped dead inside a month, having arrived at the hospital suffering from a heart attack. (This is a common measure of hospital performance, since neither the patient nor the hospital have much chance to be selective under the circumstances, and because unlike, say, waiting lists, this number is hard to fiddle with.)

They found that the higher the alternative wages available, the higher the death rate at a region’s hospitals, and the effect does not seem to be due to any intrinsic difference in the type of patient, the journey taken by the ambulance or any of the other likely explanations. Nor is this a trivial effect: if the alternative wage rises 10 per cent, the death rate rises by nearly 5 per cent.

Hall, Propper and Van Reenen also looked at measures of productivity in other service industries, including nursing homes, where pay is not regulated by the government. There is absolutely no sign of trouble in any of them.

The good news is that the NHS has recently moved to more flexible wage agreements, with more pay for staff in high-wage areas and the flexibility to add further inducements when staff shortages are a particular problem. This is a positive step, although just because NHS employers are now allowed to pay staff more in London and the south-east does not mean that they will find the money in their budgets to do so.

Nor is the NHS the only government organisation with nationally agreed pay standards. Readers based in London might enquire about teacher turnover at their local school – and hope the answer does not provoke a heart attack.

Also published at ft.com.