The costs employers need to pay to attract and retain staff varies between areas. Costs tend to be higher in areas with a high cost of living. The London wage premium is the most obvious case.
Public sector resource allocation
To help healthcare providers in England and Wales to provide a common level of service, differences in private sector wages are estimated. This is a central component of public sector resource allocation decisions and a leading example of evidence-based policymaking.
Data giving the wages of employees are used to measure differences between areas. These differences are known as standardised spatial wage differentials (SSWDs). SSWDs are used to construct the labour cost element of the staff Market Forces Factor. This policy aims to compensate healthcare providers for the unavoidable higher costs some will encounter when hiring staff, such as the need to hire agency workers.
Evidence-based policymaking relies on using the best available data. However, despite recommendations to update SSWDs annually, this has not been done for public sector resource allocation decisions for many years.
The best available evidence will change, particularly following periods of economic crisis. Recessions impact on industries and sectors unevenly. For example, the economic effects of the COVID-19 recession have been particularly damaging for the arts, tourism, and hospitality sectors.
Regions with a greater part of the workforce in badly affected sectors will experience larger effects from a recession. One of these effects will be changes in the average wage paid to employees. Therefore, it is important to re-estimate SSWDs to account for these changes.
Effects of a crisis
Our recent paper demonstrates how the failure to update SSWDs following the 2008 financial crisis impacted on the allocation of government funding to the NHS. Changes in SSWDs resulted in higher-paid areas being overcompensated while lower-paid areas have been undercompensated.
The London region experienced the largest changes. There was a significant reduction in the London wage premium. An overestimated SSWD for London that feeds through, for example, to a 1.5% overestimated allocation of funds equates to around £177m.
Lessons can be learned from the failure to update SSWDs following the 2008 financial crisis. Robust implementation of the staff Market Forces Factor requires the evidence base to be regularly updated using the best available data. As the economic effects of the COVID-19 crisis emerge it is essential that public sector resource allocation decisions reflect changes in the economy.
Elliott, R.F., Kopasker, D. and Skåtun, D. (2020) 'Public-sector resource allocation since the financial crisis', International Journal of Manpower, [Epub ahead of print].
A 'green' open access, author's accepted manuscript version of this paper is also available.
Thanks to Dr Daniel Kopasker of HERU for his work in developing this Blog post.
HERU is supported by the Chief Scientist Office (CSO) of the Scottish Government Health and Social Care Directorates (SGHSC). The views expressed here are those of the Unit and not necessarily those of the CSO.