Is the Nursing Market Malfunctioning?

This is a frequent criticism of economic thinking, but is it true? Is the price mechanism of theory divorced from the price mechanism in reality? Consider the current nursing shortage controversy.

In recent years, journalists in the mainstream media have been reporting that the United States is suffering from a nursing shortage. The journalists have been drawing much of their information from the scores of academic articles and studies on the nursing shortage.1

According to the articles and studies, the nursing shortage is not temporary. Studies of the nursing market forecast that the shortage will get worse in the coming years. For instance, the most prominent study of the nursing shortage, a study conducted by the US Department of Health and Human Services' Health Resources and Services Administration (HRSA), predicts a drastic shortage. The HRSA study projects that the shortage of registered nurses will increase from an estimated 110,800 in 2000, roughly the year in which the shortage began, to 1,016,900 in 2020.2

If the HRSA projection proves correct, the consequences would literally be deadly. A shortage of more than a million nurses would certainly cost lives.

But the real question is this: has something happened to the price mechanism in the market for nurses? To assert that the United States is suffering from a nursing shortage that will not only persist but grow worse for years to come is to assert that the nursing market is malfunctioning. Is the price mechanism in the nursing market broken?

Nursing Shortage Estimates and the HRSA Study

Unlike statistics such as the labor force, employment, and the unemployment rate, no empirical measures of occupational labor shortages exist.3  What measures there are are conjecture. Most reports of the current nursing shortage are based on casual observation, typically anecdotes of health care managers or small-scale surveys of hospital personnel directors reporting unfilled nursing positions. Such observations are notoriously unreliable, for the presence of job vacancies is hardly sufficient evidence of an occupational shortage.

Studies of the nursing shortage typically estimate the shortage by estimating the supply and demand for nurses. If the estimated quantity demanded exceeds the estimated quantity supplied, a shortage is said to exist.

The notorious HRSA study follows this method. The HRSA study models the demand for registered nurses as a function of demographic trends, national healthcare use patterns, trends in nursing staff intensity, and a variety of economic factors, including the relative wages of nurses. The study models the supply of registered nurses as a function of fresh graduates from nursing schools; rates of attrition due to retirement, career change, and the like; and the relative wages of nurses.

The baseline projections of the HRSA model are shown below.4

The model projects that between 2000 and 2020 the quantity of registered nurses supplied will shrink by 4.4 percent, while the quantity of nurses demanded will increase by 41.1 percent, resulting in a shortage of nurses of 1,016,900 by the year 2020.

Why does the HRSA study project a growing and ultimately enormous shortage? Why, according to the HRSA model, won't rising wages eliminate the shortage? Because the HRSA model assumes that the relative wages of nurses will not change between 2000 and 2020. This is an extraordinary assumption, to say the least. The model projects that the demand for nurses will grow faster than the supply but assumes nursing wages will remain the same. In other words, a malfunctioning price mechanism is built into the HRSA model by assumption.

Is the Price Mechanism in the Nursing Market Malfunctioning?

Fortunately, we do not have to rely on estimates of supply and demand to determine whether or not the price mechanism is working in the nursing market. If the price mechanism is working and the demand for nurses is growing faster than supply, then the relative compensation of nurses should be increasing, and the increasing compensation should be drawing more nurses into the market. Data on nursing wages, nursing employment, and enrollment in nursing colleges are available. What do the data show?

According to Bureau of Labor Statistics occupational wage data, between 2002 and May 2006 (the most recent data available), the average hourly wage rate of all workers rose from $17.10 to $18.84, an increase of 10 percent. Over the same time, the average hourly wage rate of registered nurses rose from $23.96 to $28.71, an increase of 20 percent.

But the wage rate is not the only form of nursing compensation that has been rising. Nurses have been receiving more lucrative benefits in recent years.5  And nurses now routinely receive signing bonuses from employers. Though signing bonuses vary considerably from employer to employer and job to job, the typical signing bonus is about $5,000.6

And how has the rising relative compensation of nurses affected the supply of registered nurses? Most studies, including the HRSA study, argue that the supply of nurses is stubbornly inelastic for two reasons: (1) it takes time to educate and train a nurse, and (2) nursing schools are already operating at full capacity and simply cannot accept larger numbers of students.

But actual data suggest that the supply of nurses is not as inelastic as studies contend. The same Bureau of Labor Statistics occupational wage data indicates between 2002 and May 2006, overall employment rose from 127.5 million to 132.6 million, an increase of 4 percent. Over the same period, employment of registered nurses rose from 2.2 million to 2.4 million, an increase of 9 percent.

Far more dramatic has been the effect of rising compensation on enrollment in nursing schools. According to the American Association of Colleges of Nursing (AACN), 72,986 non-RN students were enrolled in baccalaureate nursing programs in 2000. By 2007, that number had jumped to 141,735, an increase of 94 percent. The number of nursing graduates has increased accordingly. In 2000, 23,102 students graduated with baccalaureate nursing degrees; by 2007, that number had climbed to 41,500 — an 84 percent increase. What about all those nursing schools operating at full capacity? Perhaps they are, but the AACN reports that between 2000 and 2007 the number of colleges offering baccalaureate degrees in nursing rose from 518 to 631 — a 22 percent increase.

A Malfunctioning Price Mechanism?

Contrary to the many articles and studies, the price mechanism in the nursing market is not malfunctioning. It is working in textbook-like fashion. The increasing demand for nurses is driving nursing compensation up, which in turn is bringing more nurses into the market. Such is not the stuff of shortages but of market prices coordinating the allocation of scarce resources exceptionally well — and in reality, not just theory.

• 1For a sample of articles and studies on the nursing shortage, consult the Nursing Shortage Fact Sheet maintained at the website of the American Association of Colleges of Nursing.
• 2US Department of Health and Human Services, Health Resources and Services Administration, Projected Supply, Demand, and Shortages of Registered Nurses: 2000–2020, (2002) and What Is Behind HRSA's Projected Supply, Demand and Shortage of Registered Nurses? (September 2004).
• 3Carolyn M. Veneri, "Can occupational labor shortages be identified using available data?" Monthly Labor Review, March 1999, p. 17.
• 4What Is Behind HRSA's Projected Supply, Demand and Shortage of Registered Nurses? (September 2004), pp. 32–35.
• 5Joanne Spetz and Sara Adams, "How Can Employment-Based Benefits Help the Nurse Shortage?" Health Affairs, January/February 2006, pp. 212–18.
• 6We scoured numerous help-wanted advertisements for nurses. We found signing bonuses as high as $30,000 and as low as $1,000.