University of Bristol, Centre for Market and Public Organisation, Imperial College, and Centre for Economic Policy Research
John Van Reenen
London School of Economics, Centre for Economic Performance, National Bureau of Economic Research, and Centre for Economic Policy Research
In many sectors, pay is regulated to be equal across heterogeneous geographical labor markets. When the competitive outside wage is higher than the regulated wage, there are likely to be falls in quality. We exploit panel data from the population of English hospitals in which regulated pay for nurses is essentially flat across the country. Higher outside wages significantly worsen hospital quality as measured by hospital deaths for emergency heart attacks. A 10 percent increase in the outside wage is associated with a 7 percent increase in death rates. Furthermore, the regulation increases aggregate death rates in the public health care system.