Arnold Kling  

Vertical Supply, Vertical Demand?

Acting "As If" Hanson's Right... Tabarrok and Caplan at

Michael Mandel points to a blog post that claims we will face a severe nursing shortage. As usual, there is a government study supporting such a claim.

In Learning Economics, I derided the notion of a labor shortage (in this case, the predicted shortage was for technical workers) as showing economic ignorance. Markets clear, I argued, and the wage rate is the variable that chokes off excess demand.

In nursing, the supply curve may be somewhat unresponsive to wage rates, because of the requirement for certification and limited slots in nursing schools. On the other hand, the existing pool of certified nurses might provide an elastic labor supply. Nurses who have dropped out of the labor market at a wage of $X might reconsider at a wage of $2X.

On the demand side, the elasticity is likely to be nonzero, also. Insurance rarely pays for private-duty nurses, so that at some point as their wages rise that source of demand will fall.

For Discussion. How might hospitals substitute capital or other forms of labor for nurses?

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CATEGORIES: Labor Market

COMMENTS (10 to date)
Danno writes:

I would be very suprised if you saw Nursing become a hot job market except in the private sector. Nursing is very unrewarding in the day to day, has few social benefits, and it is associated with lots of social stigmas ("Not good enough to be a doctor, eh?").

And, if what my mother has told me is true (an ex-Nurse with a lot of friends who were/are nurses), the pay is unlikely to go up in public sectors because it's very easy for Hosptials to kick nurses around, what with their lack of ability to put any meaning behind their trade unions.

john writes:

Meanwhile in the Philippines, schools are scrambling to put up nursing programs because of high demand from students. Lately even MDs are taking up nursing as it is easier to migrate to the US as a nurse.

John Thacker writes:

My mother is a nurse. From reading various news stories and magazines, there is always either an impending nursing shortage, or an impending glut of nurses. Always. Yet somehow we survive.

Michael Mandel writes:

Generally speaking, I don't believe in labor shortages either. But I thought that the post was interesting because it argued that training new nurses required the participation of existing nurses. So if you wait too long to start training new nurses, you may never catch up with demand.

Chris Bolts writes:

Shortages of labor in the medical industry is always the excuse that governments give to increase spending in healthcare. Here in Arizona, the justification for building a new medical school in downtown Phoenix is because there is an ever-decreasing supply of doctors and trained medical staff. Although city officials admit that the school won't address the shortage in the short run, they still think it is a good idea because the doctors will go immediately into the workforce after they complete the school. Never mind the fact that some of the reasons that doctors leave Arizona is because of rising insurance costs due to rising number of malpractice lawsuits filed, a growing number of doctors who are not paid on time for services rendered (my wife used to work for a medical billing firm and some doctors would wait months before they were paid on some claims), and the overburdening regulation of the State Medical Board, not to mention that opportunities for young, intelligent doctors are much greater in the Midwest, East, and in California than it is for Arizona.

As far as substiting labor for nurses, there are a lot of careers that can do what nurses can do without going to school for long periods of time. You have nursing assistants, physician's assistants, medical techs, CNA's, and other forms of medical training that can replace nurses and do the same amount of work at a lower wage. As far as capital, today's advanced medical technology can monitor a patient's statistics, and the data can be read by a medical tech or physician's assistant, or even by the doctor him/herself if they don't feel like being lazy. Fluids can be administered via IVs and can be set to give concentrated doses without nursing intervention. Medicines that needed to be administered bi or semihourly has been much improved to the point that it can be administered once and last for hours. All of the advances in medical technology actually cuts down the time a nurse needs to spend monitoring a patient so much so that he/she can monitor multiple patients without breaking a sweat. Which begs the question: if there are so many substitutes for the labor of nurses and capital which decreases the monitoring time for nurses, why is the government worried about a shortage of nurses?

Hospitals now have computerized and automated medicine dispensing systems which not only save a lot of labor, but cut errors (some fatal) to almost nothing. For one specific example of capital replacing labor.

It used to be that there were a lot of registered nurses (mostly women) who liked working in medicine, but didn't want the 80 hour weeks that went with being an MD. These people moved in and out of the work force regularly. Or shifted from part to full time as demand for their services changed.

A good RN will often be a better judge of the efficacy of certain treatments, or medication, than the attending physicians, since they have more immediate experience of what works and what doesn't.

spencer writes:

I've been married to a nurse for 40 years and there has been a shortages of nurses over that entire period. But the job of nurse has changed massively over that 40 years. A nurse use to care for patients and administer medicine. Now, others down the skill-chain do those jobs and nurses are managers and administrators of those people. 40 years ago the averagge nurse was a graduate of a 3 year program that was half on the job training. Now, a nurse has at least a BA and more likely a MA. So to answer your question, is that the substiturion of capital for labor has been going on for years. But it is the nurses, not the hospitals that have been doing the substitution of education capital for labor.

Lancelot Finn writes:

My interest in the discussion is in the theoretical possibility of labor shortages. The argument about the impossibility of labor shortages rests on the assumption that preferences are non-alphabetic. If this assumption does not actually hold, labor shortages are possible.

Alphabetic preferences are when a person has preferences over A and B such that if bundle X has more A than bundle Y, bundle X will be preferred to Y regardless of the amount of B in either bundle. Only if the two bundles contain the same amount of A will the amount of B in each bundle influence the person's preferences.

If people's preferences with regard to careers and money are alphabetic, or are alphabetic over a certain level, then a labor shortage of possible.

For example, suppose there are two careers, economists and nurses. 90% of people prefer to be economists, 10% prefer to be nurses, but we need 20% of people to be nurses. Suppose further that GDP is $40,000/yr, but that an affluent upper-middle-class lifestyle costs $60,000/yr. Many people are willing to substitute more money for a more satisfying career at incomes under $60,000/yr. At incomes above that level, people still want more money, but the marginal value of more money has fallen far enough that it can never exceed the intrinsic rewards of a more satisfying career. So people's preferences are effectively alphabetic.

As long as GDP is $40,000/yr, people can be incented to become nurses by raising nurses' salaries (and lowering those of economists, at least in real terms). But suppose that GDP doubles. Now, if economists and nurses both earn $80,000/yr, the 10% who prefer nursing will still do it, but no one else can be incented to enter the profession. Only if economists' share of the pie is reduced so much that they earn less than $60,000 do some respond to the incentive to enter nursing. As GDP rises, the only way to keep people entering the nursing field will be to completely prevent economists' wages from rising any higher.

Is this a plausible story for the nursing shortage. Well, I don't know, but probably not. But it's worth raising the theoretical possibility. Furthermore, I think it's quite plausible that people's preferences with respect to careers are often quasi-alphabetic. Why? Because a career is more than something you have or do, it's who you are. As our society gets richer with time, alphabetic-preference-induced labor shortages may become more and more of a problem.

(To help understand the alphabetic-preference-labor-shortage concept, think of the labor market for prostitutes in an opulent society whose women-- not men-- are devoutly religious.)

Here's a link for Integrated Healthcare Systems:

that answers Arnold's question.

Tracy writes:

Medical care payment practices means that there is a gulf between what people demand and what they directly pay for. (ie large quantities of health care is paid for either by insurance systems or taxes).

In these circumstances, why on earth would you expect supply to equal demand?

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