Shortage or surplus: economic and noneconomic approaches to the analysis of nursing labor markets.

• Author: Lane, Julia

1. Introduction

   The current health care debate creates a sharp contrast between economic and noneconomic approaches to resource allocation. Many economists believe that resorting to cost containment measures will lead to shortages in health care delivery. The definition of and response to such shortages will be critical components of the debate.

   Shortages are not new: they have characterized the health care labor market for decades [8; 11]. There are strong differences between the economic and noneconomic views of shortages, however. Medical professionals define shortages in two ways: a needbased approach and a ratio technique. The former identifies the number of professionals needed to perform certain tasks based on the judgment of a medical professional. The latter compares the current professional/population ratio to a projected future ratio, and identifies a difference as a shortage [2]. A variant of the latter is the one used by the Office of Shortage Designations, which identifies health professional shortage areas. U.S. policy has been to increase supply by subsidizing the training of medical personnel if they subsequently work a period in the shortage area.

   The economic approach is quite different. A shortage exists when quantity demanded is greater than the quantity supplied at the market price. Economists analyze the pricing mechanisms of the marketplace, and allow for both the substitution of other inputs and technological change [3]. In certain circumstances, such as if monopsony characterizes the market, supply side policies aimed at increasing the supply of medical personnel through federal educational subsidies might worsen the problem.

   This paper shows the differences in outcomes between the two different approaches, using the market for nurses as an example. We develop an economic model to identify shortage areas and compare this with that derived from the medical literature and used by the federal government.

2. Alternative Approaches

   The Economic Approach

   An economist who observes shortages or surpluses in a labor market will look for supply or demand explanations. If markets fail to clear, this is likely to be due to a failure of wages to adjust instantaneously.

   Probably the most popular economic model to explain shortages in health care labor markets has been that of monopsony. In a monopsony market such as that for registered nurses, equilibrium occurs where marginal factor cost equals marginal revenue product. The wage rate hospital pay their nurses corresponds to the wage rate on the supply curve at the quantity of nurses hired. At this wage, a shortage of nurses occurs. In response to complaints of a nursing shortage, the federal government typically increases subsidies for nursing education and training. Increases in the supply of nurses would then fail to result in a competitive equilibrium and might even increase the shortage. The severity of shortage will depend on the elasticity of demand for nurses, which will, in turn, depend on their relative wage rate.

   Figure 1 demonstrates this. In Figure 1, the supply has increased from S to S[prime] and the profit maximizing quantity of nurses has increased from [N.sub.s0] to [N.sub.s1]. Although the number of nurses employed by the hospital has increased, the quantity demanded has increased by an even greater amount. Thus, the shortage at the wage [W.sub.1]([N.sub.s1][Na.sub.d1]) is greater than the shortage at the wage [W.sub.0]([N.sub.sd][N.sub.d0]). The hospital could then reduce the shortage by paying a wage equal to the competitive equilibrium wage at the intersection of supply and demand.

   There are other economic explanations for non-market-clearing wages: efficiency wage; dual labor markets; unions; implicit contracts and insider/outsider models. Each story has a common theme, namely that wages do not adjust instantaneously and, therefore, there is likely to be involuntary unemployment. These explanations are well-known in the literature [1; 7], so we do not develop them further here.

   This approach is characterised by a belief that there is a role for market forces in equilibrating demand and supply - with consequent implications for policy. Davidson points out:

   ... programs that reward workers for finding jobs or firms for filling vacancies, e.g., wage or job subsidies and bonuses to workers finding reemployment, almost always perform well [1, 154].

   The Noneconomic Approach

   The noneconomic approach may be characterised as one which identifies a fixed need without focussing on the role of the market mechanism. The need, based approach has two ways of identifying need: it can be determined by a medical professional or by a ratio technique. The latter is the one used by the Office of Shortage Designations (OSD) which identifies health professional shortage areas. The OSD calculates total nurse supply by adding up the number of FTE nurses in short term general hospitals in a county. It then uses a fairly complex ratio technique based on the:

   basic shortage criterion ... is that each hospital should have an FTE-nurse to average-daily-patient-census ratio at least equal to the ratio which separates the lowest quartile for all other hospitals of its type [12, 2].

   Nurse shortages exist if the need based on this measure is greater than the fixed supply of nurses in the county.

   If need and supply are viewed as fixed, it is evident that the only way to reduce a gap between the two is to increase supply. Thus, U.S. policy in the past has been to subsidize the training of medical personnel if they subsequently work a period of time in the shortage area, increase immigration of foreign professionals or relocate training centers.

   The policy implications of...