Pay for NHS clinical staff (nurses and physicians) is set nationally, with very little variation to take into account local labour market conditions. This is a problem because in the UK regional pay differences are high, even when you control for things like education and skills. As a result, there are large differences in the UK between wages inside and outside sectors where pay is strictly regulated like the NHS. In some regions NHS clinical staff are overpaid relative to local labour market conditions, while in others (London and the South East) clinical staff are underpaid and would get higher pay if they left the NHS for the private sector.
This leads to worse outcomes for patients according to a 2010 paper from Propper and Von Reenan. Looking at the hospital death rate for heart attacks alone, they find that national pay setting for NHS clinical staff (nurses in particular) leads to 366 extra deaths every year.
In effect, national pay setting in the NHS for nurses acts as a price ceiling in high wage regions, which in the absence of other countervailing factors should generally lead to an undersupply.
There are two major predictable effects of this defacto price ceiling. First, we should expect nurses to move from areas where their wages are relatively low (London and the South-East) to areas where their wages are relatively high (South-West and the North-East). Second, we should expect nurses in London and the South East to leave the regulated sector (NHS) for the unregulated sector (private nursing homes) where they can expect higher pay. Put simply, we should expect the NHS to get better in low wage regions, and get worse in high wage regions.
Now this alone doesn’t really tell us much about the overall effect of setting pay nationally in the NHS. Perhaps the benefits of better service in the North-East outweigh the harm of worse service in London.
However, the data implies that regulating pay leads to worse outcome across the NHS on balance. Part of the problem is that people have strong area-based preferences: they aren’t willing to just up sticks and move across the country unless they’re getting a serious jump in wages. So instead they’ll be more likely to stay in the high wage region and just leave the NHS altogether to move into the nursing home sector where pay isn’t set nationally.
On balance, this leads to 366 extra heart attack deaths each year across the NHS. But the authors suggest this figure might, if anything, be understating the harms of national pay setting:
If we were able to calculate the fall in quality across a much wider range of illnesses (deaths and more minor loss of quality of life), we would scale up the social loss by a very large amount.
If we devolved pay negotiation and hiring powers to trusts, we could raise standards across the NHS and most importantly, save lives!