A way of aligning pay to performance and outcomes

The American economist Robert Solow argued that labour markets “cannot be understood without taking account of the fact that participants, on both sides, have well developed notions of what is fair and what is not.”1 This may explain why many NHS trusts in Britain have been reluctant to implement local pay mechanisms and performance related pay. As a result the creation of the NHS internal market has not led to a more efficient market for clinical labour. Indeed, opportunities have been missed—the recent review of the distinction award system, for example, paid little attention to incentives for efficiency.2 Nevertheless, the present government is retaining the purchaser-provider split and is likely to continue to seek efficiencies. With care and a common sense approach, economics can contribute to the analysis and improvement of the clinical labour market.

Some approaches to the analysis of labour markets reflect Solow's common sense approach. Efficiency wage models, for example, accept that workers …