Adult social care labour supply: pay increase impact assessment

Executive summary

Background and motivation

To support the effectiveness and sustainability of the Adult Social Care (ASC) sector in Scotland, the Cabinet Secretary for NHS Recovery, Health and Social Care uplifted ASC minimum pay from £10.90 to £12.00 per hour in April 2024. This uplift in pay is expected to improve staff recruitment and retention in a sector in which a large share of care staff is paid a minimum wage and employers experience challenges with high turnover and vacancies.

A key question is: “How will the increase in the ASC wage floor impact employment in the sector?” There is currently no available evidence on the responsiveness of ASC employment to changes in wages.

Aims

This study is a first attempt to provide estimates of wages elasticities of labour supply to the ASC sector in Scotland and use them to predict the impact of a sector wage floor increase on employment.

Methods

Seven-years of longitudinal data (2016-2022) from the Adult Social Care Workforce Data Set (ASC-WDS), the main source of ASC workforce intelligence for England, managed by Skills for Care, together with Scottish ASC wage distribution data from the Office for National Statistics (ONS) Annual Survey of Hours and Earnings (ASHE) was used for the analysis. ASC-WDS data was used to estimate the responsiveness of care staff to a wage change due to the lack of individual-level data on pay, employment and demographic characteristics for Scotland.

The predicted impact of an increase in the ASC wage floor on employment in the sector was estimated in two steps. First, the wage elasticity of labour supply in the ASC sector (i.e., the percentage change in employment resulting from a 1% change in wages) was estimated using an adjusted version of the ASC-WDS panel. The adjusted dataset consisted only of care staff in the North East, North West, Yorkshire and The Humber, East Midlands, and West Midlands regions of England in order to maximise comparability with Scotland’s labour market and excluded staff employed in a home care setting, due to imprecision in their wage measurement. Moreover, estimations were weighted to correct for the difference in market shares of public, private and voluntary ownership between Scotland and England.

Next, the estimates of the wage elasticity of labour supply were then used, together with Scottish ASC wage distribution data from ASHE, to predict the effect of an increase in the ASC wage floor on employment. The total predicted employment effect of raising the wage floor was computed as the sum of employment changes associated with successive increases in wages, starting at the bottom of the distribution, up to the new wage floor.

Findings

Estimates from the first part of the analysis imply that a 1% increase in wages would lead to an increase in employment of between 1.75% to 1.80%, depending on the initial wage level. These estimates suggest that an increase in wages in the ASC sector is likely to have a positive effect on employment.

Based on the above estimates, the second part of the analysis predicts that, all else constant, an increase in the ASC wage floor to £12.00 in 2024 would lead to an increase in employment of between 2.7% and 4.0% in the sector. A larger increase of the wage floor to £12.50 would lead to an ASC employment increase of between 5.4% and 7.5%, while an increase of the wage floor to £13.00 would lead to an ASC employment increase of between 8.4% and 11.2%.

Limitations

The analysis and findings are subject to the following limitations. First, the analysis implicitly assumes that wages in all other sectors remain unchanged. In reality, the minimum wage for all workers aged 21 and over (i.e., National Living Wage) also increased in April 2024 to £11.44 per hour. This reduces the relative increase in pay due to a rise in the ASC wage floor and will likely reduce the impact of the ASC pay increase on ASC employment. Additionally, non-ASC employers that compete for the same workforce (e.g., hospitality and retail establishments), could respond to the new ASC minimum wage floor by increasing their wages above the new NLW. This will similarly reduce the relative increase in pay due to the rise in the ASC wage floor. We expect, therefore, the ASC employment effects to be lower than predicted by our model, with actual effects depending on wider local labour market adjustments.

Second, the analysis relied on hourly pay by deciles for Scotland. To address this data limitation, predicted employment effects are reported by taking either the lower or upper end of the decile bracket as initial pay. This goes some way to addressing the uncertainty regarding the true wage distribution and provides lower and upper bound predictions, with actual effects on employment expected to be somewhere between the two.

Third, the home care staff excluded from the analysis due to wage measurement issues, may in fact have a different response to wages compared to staff in other care settings. We had however, to implicitly assume that this was similar. More accurate data on hourly pay of home care staff on their full time spent at work (including travel time) would be needed to confirm the similarity (or difference) in wage elasticities between care settings.

Fourth, the analysis is based on data from England due to the lack of Scottish data on pay and employment at employer/employee level. Despite the adjustments made to the analysis sample to address potential differences between the Scottish and English contexts, there remain potential differences that have not been accounted for. One concern is that differences in the sectoral split of ASC providers in Scotland versus England may reflect structural differences between the markets. For example, in England private care providers are facing less labour market competition from the public sector due to the relatively small share of localised public ASC provision. In Scotland the public ASC sector is much larger and may have a stronger influence on pay and employment conditions in the private sector. It is possible, therefore, that employers and employees from respective contexts may respond differently to the same minimum wage policy. To shed light on this would require more granular individual-level wage data for Scotland, which was not available to the research team at this stage.