Public-sector resource allocation since the financial crisis

Abstract

PurposeDistinguishing what employers in different areas of Great Britain need to pay to attract and retain labour has been a central component of public-sector resource allocation decisions. This paper examines how changes in the pattern of spatial wage differentials following the global financial crisis have impacted on the formulae which allocate government funding to local government and health providers in the NHS.Design/methodology/approachUsing employer-reported data on earnings, we examine spatial patterns of private-sector wages in Great Britain between 2007 and 2017. The method permits the analysis of finely defined geographical areas and controls for differences in industry and workforce composition to distinguish those differences that are attributable from unmeasured characteristics, such as differences between areas in the cost of living and amenities. These standardised spatial wage differentials (SSWDs) underpin the funding allocation formulae.FindingsThe analysis shows that since 2007 private-sector wage dispersion, both within and between regions, has reduced: lower paid areas have experienced a relative increase in wages and higher paid a relative decline. Over the period, there was a significant reduction in the London wage premium.Originality/valueThis paper demonstrates the importance of ensuring established policies are applied using contemporary data. The SSWDs used to distribute government funds have not been re-estimated for some time. As a result, the current resource allocation model has overcompensated the London region and undercompensated others during this period.