The role of employee‐generated externalities in explaining relative earnings for health‐service workers Available to Purchase

Asymmetric information between producer and consumer of health care gives rise to a principal‐agent relationship between these two parties. If the consumer of care can credibly assume that producers are motivated by factors other than selfish gain obvious benefits in terms of process utility will accrue and the delivery of care will be facilitated. Examination of earnings equations using a UK data set, where monetary and non‐monetary employer‐provided benefits have been controlled for reveals that in the UK health‐service workers earn less than employees with comparable skills generally. Employee‐generated externalities associated with pursuance of personal goals, it is contended, explain these differences. When such factors are controlled for, returns to health‐service workers are seen to be comparable with those of workers generally. It is concluded that health‐service workers are “different” from workers generally – though not uniquely – in as much as they make reference to arguments in their objective functions to a greater extent than do workers generally. These arguments could, with justification, be termed philanthropic motives. This, we contend, questions the validity of standard neoclassical theory as it relates to this group of workers and demands more thoughtful policy responses in devising incentives in this sector.