Preliminary

In this paper, we examine whether labor markets for health workers affect health outcomes in hospitals. We exploit the fact that wages for clinical staff in the British National Health Service are centrally regulated with little variation to reflect the substantial differences in local labour markets. Consequently, 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 AMI death rates (within hospital deaths within 30 days of emergency admission for acute myocardial infarction) 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 3 % to 8 % increase in AMI death rates. We find that an important part of this effect is operate 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 also find that hospital performance is improved by a richer skill mix, especially of physicians and to a lesser extent, nurses (as compared to less skilled staff). We quantify the magnitudes of these “hidden costs ” of labour market regulation, which appear to be substantial