Adult social care labour supply: pay increase impact assessment

5. Discussion

In this study, we estimated predicted effects of labour supply related to the increase in the minimum wage floor in the ASC sector in Scotland in April 2024. This is an important policy intervention aimed at improving recruitment and retentions for a sector facing increasing demand for services.

Due to the lack of individual level data on ASC staff employment and wages for Scotland, the responsiveness of care staff labour supply (i.e., recruitment and retention) to changes in wages was estimated using a large dataset on ASC staff and employers for England: the Adult Social Care Workforce Data Set (ASC-WDS) collected and managed by Skills for Care (Skills for Care, 2023). The predicted labour supply impact to the increase in the minimum wage floor in ASC was based on a model developed in Vadean et al. (2024) which estimated wage elasticities of labour supply to the ASC sector in England. However, due to the differences between the Scottish and English labour markets, a preferred model in this study was estimated using data for a subsample of care staff employed in certain English regions. These regions, England’s North East, North West, Yorkshire and the Humber, East Midlands and West Midlands, were identified as providing (on aggregate) a closer match to labour market realities in Scotland, both in terms of job density (i.e., the number of jobs divided by the resident population aged 16-64, and thus job opportunities outside the ASC sector) and economic inactivity rates (i.e., the percentage of working age people that are out of work and not actively looking for work, not waiting to start a job, not in full-time education, caring for their family or retired). Estimations were also weighted to correct for differences between Scotland and England in the market shares of the public, private and voluntary sectors.

The analysis focused on the impact of the wage floor policy on employee numbers (i.e., the extensive margin). This focus aligns with the broader policy objective of improving retention and recruitment of care staff. Nonetheless, employment can also be more broadly defined to consider the number of hours worked, for a given staff headcount. Some previous studies on wages elasticities of labour supply have studied the effects of changes in wage on hours worked (i.e., the intensive margin); for a review see Bargain and Peichl (2016). However, hours worked are less well captured in the dataset used in this study, particularly for employees on contracts with no guaranteed working hours (i.e., zero-hours contracts). Therefore, an analysis on the relationship between wages and working hours was not included and our predictions are limited to the changes in employee headcount.

Our model predicts that increases in the ASC minimum wage floor would have a positive effect of improving recruitment and retention in the ASC sector. Holding everything else constant, an ASC minimum wage increase to £12.00 (i.e., 10.1% nominal or a 6.1% real wage floor increase) is predicted to lead to an ASC labour supply increase of between 2.7% and 4.0%. A larger increase of the wage floor to £12.50 (i.e., 14.7% nominal or a 10.5% real wage floor increase) would lead to an ASC labour supply increase of between 5.4% and 7.5%, while an increase of the wage floor to £13.00 (i.e., 19.3% nominal or a 15.0% real wage floor increase) would lead to an ASC labour supply increase of between 8.4% and 11.2%.

The predictions have, nonetheless, several limitations.

5.1 Limitations of the analysis framework

Our point estimates of wage elasticities of labour supply are subject to statistical uncertainty. Nonetheless, all estimates reported in the Technical Annex, Tables A7 to A10 have high statistical significance. Moreover, due to wage measurement issues for home care staff, the response of ASC staff to wages has been approximated excluding home care employees. While this approximation was required to reduce potential measurement bias, the wage elasticities of homecare staff (38% of our initial sample), may in fact be different to that of staff in other care setting. To address this issue, we would need more accurate data on hourly pay of home care staff on their full time spent at work, including travel time.

The analysis also assumed that the increase in the ASC wage floor affects only the social care sector and that all other related factors remain unchanged. In particular, this means that employers in other sectors do not respond by adjusting their wages. This assumption would be more likely to hold if the ASC labour market is small compared to the wider market for workers with similar characteristics. In this instance, the social care sector could be seen as a ‘price taker’ relative to the wider labour market.

The ASC sector in Scotland, however, accounts for about 7.6% of employment overall (ONS Annual Population Survey 2021) and the share is even higher when considering only employment in low-paying occupations (e.g., care, retail, hospitality, cleaning, etc.). As such, competition for the same pool of workers may lead employers outside the sector to respond to an increase in the ASC minimum wage floor by raising their wage offers as well (i.e., we expect some degree of pass-through of the policy to wages in other sectors). In this case, the minimum wage policy is likely to have a smaller effect on ASC employment compared to our estimates. Nonetheless, since it is highly unlikely that non-social care employers respond more strongly to the policy than social care employers, we expect some difference between social care and non-social care wages to remain after accounting for wage adjustments in all sectors. Accordingly, we expect the increase in ASC wage floor to have a positive impact on employment, but lower than our predicted figures, with actual effects depending on wider local labour market conditions.

In deriving predicted effects of the rise in ASC wage floor, the analysis assumed that the policy only affects people whose pay are below the new minimum. This implicitly assumes that employment at higher wage levels remains unchanged. In reality, such indirect effects on pay and employment are possible if employee compensation is based on a wage schedule and employers respond to the policy by shifting wages at other points of the schedule upwards. To the extent that retention and recruitment for these better-paid job roles are improved, the policy would also have a positive effect on employment that our analysis does not account for. We expect though that the underestimated employment effects from increases in pay above the new minimum wage floor to be smaller than the overestimated effects from assuming wages in other sectors constant.

The increase in NLW to £11.44 per hour for all workers in the UK aged 21 and over in April 2024 is a major policy intervention affecting wages in all sectors, including those that are competing with ASC for labour force. We expect the predicted ASC employment effect, resulting from the increase in the minimum wage floor for ASC staff in Scotland, is likely to be significantly offset by the UK minimum wage policy. In addition, Scottish employers in competing sectors (e.g., hospitality and retail), can further increase wages as a reaction to the new ASC minimum wage floor, as argued above. Overall, our predicted effects on labour supply rather represent an upper limit.

5.2 Limitations in Scottish wage distribution data

Our analysis relies on hourly pay in ASC in Scotland by deciles published by the ONS. This means we do not know how wages are actually distributed between adjacent deciles. To address this data limitation, we computed for each bracket (i.e., 10^th to 20^th percentile, 20^th to 30^th percentile, etc.) predicted employment effects taking either the lower or upper end of the bracket as their initial pay. The predicted employment effects based on the higher and lower initial wage levels correspond to the lower and upper bounds of predicted employment effects, respectively. We expect that actual effects on employment to be somewhere between the two predicted values. This goes some way to addressing the uncertainty regarding the true wage distribution.

5.3 Differences between the Scottish and English labour markets and economic conditions

As noted above, the present analysis is based on data from England due to the lack of Scottish data on pay and employment at the establishment (or more granular) level. Although we have sought to address some of the differences between both contexts, there remain potential differences that cannot be straightforwardly accounted for. One concern is that differences in the public-private-voluntary sector composition of social care providers in Scotland vs. England may reflect structural differences in both markets. If so, it is possible that employers and employees from respective contexts may respond differently to the same minimum wage policy. To shed light on this would require individual-level wage data for Scotland. A potential data source for future analysis could be the Annual Population Survey (APS), depending on its sample size of social care employees located in Scotland.