Area Cost Adjustment: A Review
30 May 2005
By Dr. Richard Hern with Professor Andrew Oswald of the University of Warwick and Professor David Blanchflower of Dartmouth College
In this report, the authors review the UK's local funding mechanism, known as the Area Cost Adjustment (ACA). The report assesses the case for using Annual Survey of Hours and Earnings (ASHE) data, an updated version of the New Earnings Survey (NES), to adjust the budgets of local authorities and recommends using Labor Force Survey (LFS) data as an alternative to ASHE/NES data. The report focuses on the impact of these changes throughout the South East of England, specifically on West Sussex.
NERA's analysis of ASHE/NES data indicates that areas of southern England, such as West Sussex, are under-compensated by the current ACA system. The authors identify two key weaknesses in the NES data that lead to biases in estimates of regional wage differentials. First, the NES does not sample low paid workers thoroughly enough and second, the NES does not have information on the qualifications of the individuals in the sample. Because the south of England is more vulnerable to understatement of regional wage variations than the north, where wages are less varied, NERA's report recommends using LFS data as an alternative to the ASHE/NES data, as was recommended by the Elliott commission in 1996. The authors estimate that using the LFS data would lead to a five percent increase in relative wage estimates for the South East. They further argue that the lower limit on Labour Cost Adjustment (LCA) figures be abandoned and call for greater transparency in the UK government's preparation and verification of Labour Cost Adjustment (LCA) figures.
