Monday, June 19, 2006

Glass Price Ceiling?

For a good 20 years (or so it seems) the press has been telling us there is a nursing shortage. I’m still not clear on what a “shortage” means in this context. Sometimes when people use the word “shortage”, they just mean that there is not as much of something as one would have hoped. For example, if someone says there is an “oil shortage” in the US today, they really mean that they wish there were more oil, so we wouldn’t have to pay so much for it. If this meaning applies in the case of nurses, then the rest of this post is irrelevant.

When economists use the term “shortage”, however, they have a specific meaning in mind: the quantity of something demanded exceeds the quantity supplied at the current price (or, in the case of nurses, one might say, at the current wage or salary). In a well-functioning market without artificial constraints, shortages aren’t supposed to happen, or at least they aren’t supposed to last very long (certainly not 20 years). If the quantity demanded exceeds the quantity supplied, suppliers (nurses, for example) will find it in their interest to charge a higher price (in the case of nurses, to hold out for more pay). When the price rises, usually more people will find it in their interest to become suppliers (e.g. nurses), and fewer people will demand the product (e.g. nursing services) at the higher price. (At least one or the other of these things should happen.) Eventually (almost immediately in a well-functioning auction market, maybe a matter of months or even years in a market with sluggish price-setting, but surely never more than a decade!) the quantity supplied will rise, and/or the quantity demanded will fall to the point where they become equal, and there is no more shortage.

Why hasn’t this happened with nurses? Some people point to a bottleneck in nursing schools. Obviously existing nurses have only a certain amount of labor they can (safely) supply, and they may already be “tapped out”; others can’t become nurses without going to nursing school; and nursing schools have a limited number of slots for students. The problem with this argument is it only pushes the shortage into a different market. If there is a shortage of nursing school slots, the same “shortage” arguments should apply. If the nursing shortage pushes up the pay for nurses, then nursing students can afford to borrow more money, and nursing schools can charge more, and it will be profitable for them to expand and for more people to become nursing instructors. Again, it might take some time but – 20 years???

I don’t know the answer, but I have one theory. Feminists have long noted a tendency for typically female occupations to pay less than typically male occupations. Often, economists have good explanations for occupational differentials, but there is troubling evidence that even within occupations, and even within particular jobs, and even when controlling for things like education, years of service, and performance ratings, women are paid less than comparable men. To me, it suggests that there is a sociological component to wage determination. Though in many cases competition and other market forces may squeeze discrimination out of the market, I would suggest that nursing may be one field where this process hasn’t worked. Because nursing is considered a typically female occupation, the idea of paying nurses six figure salaries may be difficult for many employers to swallow. If so, that might explain the persistent shortage.

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Anonymous Anonymous said...

I have another possible explanation: the age shift towards an higher percentage of the population being older, and therefore more likely to need treatments which in turn require nurses, has been rising in a continous fashion over the past 20 years, so that every adjustment fails to catch the ever-rising demand, creating a permanent shortage.

Tue Jun 20, 05:13:00 PM EDT  
Blogger spencer said...

In the old days for the most part nurses were trained by nonprofit hospitals -- it was a classic example of cross subsidies.

But over the last generation for profit hospitals have cherry picked the most profitable parts of hospital care from the nonprofits so that the nonprofits could no longer cross subsidize public goods like nurses training.

My question is that if you believe in perfect markets or are a libertarian there should never be
such a thing as nursing shortages.
And the way our host asked the question implied he believed that.
I have seen no evidence that government actions prevented the private sector from developing nursing schools to train new nurses. But the fact that we are paying large bonuses to attract nurses from foreign countries implies that we a shortage.

So, if this an example of a market failure? Or is it an example or demonstration that while capitalist markets may be very good at clearing markets in the short run they are extremely inefficient at dealing with long run shifts or structural economic changes.

Tue Jun 20, 06:03:00 PM EDT  
Blogger knzn said...

I really don’t believe in perfect markets, and I’m certainly not a libertarian, but I do believe that, given enough time, the basic laws of supply and demand ought to work in any particular market. (This doesn’t imply that everything will turn out for the best overall: there will always be missing markets, and there are important distributional issues to consider.) I guess the question is, how much time is enough? 20 years seems like a heck of a long time. But FDG may be right about the effect of a continuous demand shock. Usually we think of supply and demand shifts as happening one at a time, but if the demand curve is continuously shifting, year after year after year, in the same direction, then maybe the market mechanism never catches up.

Tue Jun 20, 06:20:00 PM EDT  
Anonymous Anonymous said...

I dont have much to say (Im tired), but on demand/supply:

1. female labor force participation has increased enormously over the past thirty years, so demand must be increasing even more. This sounds right, given health is now about 15% of gdp; its a normal good.

2. knzn, your suggestion sounds way off. Look at Beckers work on discrimination. If Im a greedy employer, I really dont care about discriminations; profits are the name of the game.

3. female labor supply elasticities are quite high, so again, it seems demand is huge. And fertility is falling, which should have raised supply too.

4. Perhaps supply of nurses has fallen since nursing is perceived as an inferior occupation; women prefer banking etc these days. So, supply could be very inelastic. That said, free mkts would have commanded a "compensating differential" for nurses.

Wed Jun 21, 02:18:00 AM EDT  
Blogger knzn said...

mvpy: “If Im a greedy employer, I really dont care about discriminations; profits are the name of the game.”

First of all, I think you’re missing a critical part of Becker’s argument. In principle, an employer need not be greedy and might prefer to indulge his sociological preferences rather than maximize profits. But if the product market is competitive, that employer will go out of business. To the extent that product market competition is imperfect (and perhaps a firm’s principals cannot adequately police their agents to assure profit maximization) there is some scope for discrimination.

I think a vaguely similar argument would apply here, but note that this is a very different case from what Becker studies. I’m not suggesting that there is literally “discrimination” in nursing. The question is, why don’t salaries for all nurses rise more quickly? I do have to assume some sort of imperfect competition, because if both labor and product markets were perfect, then an employer could raise nurses salaries by an epsilon and attract all the labor needed away from other employers, and eventually employers who paid sub-equilibrium wages would have no employees. But I think you need such an assumption just to explain the existence of a shortage.

Wed Jun 21, 08:58:00 AM EDT  
Anonymous Anonymous said...

knzn, your blog is excellent. I wish I knew more pre-Homeric Greek, too, (as you joked in a pervious post), so I could translate your nom de plume.

My wife is a nurse, and says it's an occupation that's very easy to go part-time (herself included). Part-time positions are notoriously hard to observe in survey data (although payroll data should be pretty accurate).

She's also noted an increase in the number of links the responsibility chain at hospitals:
Doctor, Nurse Practitioner, Registered Nurse (usu. 4 yr degree), Licensed Practical Nurse (2 yr degree), Nursing Assistant (1 semester).

The for-profit hospitals can naturally pay the lower rungs more, so they shift the work to the cheaper employees. Your market analysis is great microeconomics for asking why this market isn't self-clearing, but ignores the substitution effects.

Technology, clinics and at-home care by health aides provide more substitution.

Finally, my wife gets junk mail offering her nursing work in California where they fly you in, you work two 12-hour shifts in 36 hours, and they fly you back home. She also notes that foreign nurses are increasingly coming to the U.S. for more money, causing an unfortunate brain drain in African and Asian hospitals.

Wed Jun 21, 01:43:00 PM EDT  
Anonymous Anonymous said...

I think the AMA does keep the overall number of nursing graduates down. They certainly do that with doctors (essentially flat for the last 30 years -- it's in the Statistical Abstract of the USA, but I can't be bother right now to look it up).

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