Politics, Economics, and Nursing Shortages: A Critical Look at United States Government Policies

Rob Elgie, BSN, RN, BC


Nurs Econ. 2007;25(5):285-292. 

In This Article

The Economics of Nursing Workforce Subsidies

In the nursing labor market, licensed nurses sell a variety of nurs ing services while nurse em ployers buy the nursing services they need with wages and other compensation. If there are not enough nurses to meet the needs of the employers, this is called a labor supply shortage. Supply shortages (and surpluses) occur cyclically in free market economies; they are expected and natural (Browning & Zupan, 1999). During labor shortages employers must compete with one another by increasing wages and other compensation to attract those nurses who are available. If the shortage persists, then wages and compensation must continue to rise until compensation for nursing is competitive with compensation for other occupations so that non-nurses will be attracted to buy nursing education, get licensed, and provide the nursing services needed.

The economic concept that the independent actions of buyers and sellers tend to move the market toward equilibrium where there is no shortage or surplus is basic in the classic and current literature of economics (Browning & Zupan, 1999; Campbell, 2006; Smithson, 1982). "The amount of labor actually used...is determined on the basis of maximizing decisions by both the individual labor supplier and the firm" (Smithson, 1982, p. 585). When enough nurses are attracted by the higher wages (and other compensation, as will be discussed), then the wages will naturally stop rising because there is no longer need to attract additional nurses. This is how supply and demand for nursing labor should interact to produce what are called fair wages (Campbell, 2006); fair wages are determined in two-party transactions between nurses and the employers.

Subsidies are a macroeconomic practice that introduce a third party and disrupt the market equilibrium. Bernard Friedman (1982), professor of economics at North western Uni versity, writes: "Ordinary economic transactions occur between two parties, a buyer and a seller. A subsidy is a grant of money from an outside third party to either the buyer or seller in the transaction. Subsidies generally allow a buyer to receive a good or service for less expense than would otherwise have been necessary" (p. 995). The government is usually the third party that provides subsidies, but occasionally other third parties such as hospitals and corporations also subsidize nursing education on a lesser scale.

Regardless of the source, the problem with subsidies is that nurses who receive subsidized educations are able to provide nursing services for less compensation because they paid less or nothing for their educations (Friedman, 1982). When there are large numbers of licensed nurses in the workforce supplied by subsidized educations (especially if much of the workforce has been subsidized for many years), then there are large numbers of nurses providing nursing services for less compensation and the total cost of the nursing workforce supply is reduced. As current data reflects, many nurses are attracted to other occupations; enough, in fact, to provide a surplus of nurses were they all actually work as nurses.

Friedman (1982) goes on to note that the rationale for subsidy programs in general is controversial. Subsidy programs for nursing education are not controversial in current literature, but considering their failure to move nurse labor supply and demand toward equilibrium they should be. To better understand the effect of subsidies on nursing labor, studying the effect of subsidies on other workforces is useful. Eric Weinstein, a doctor of mathematics at Harvard University, has written about labor shortages of scientists caused by subsidies. Dr. Weinstein is concerned that the recruitment of foreign scientists to fill domestic positions lowers wages to below what they would be in a fair labor market. This concern is particularly relevant to nursing since significant numbers of foreign nurses are recruited to fill domestic positions in the United States (U.S. Depart ment of Health and Human Ser vices [DHHS], 2004).

On this topic, Dr. Weinstein cites the 1990 congressional testimony of Dr. Michael S. Teitelbaum, who later became vice-chairman of the U.S. Commission on Immigra tion Reform: "...the very phrase itself, ‘labor shortage' provokes puzzlement or amazement among most informed analysts of U.S. labor markets...[To attract] workers, the employer may have to increase his wage offer....So when you hear an employer saying he needs immigrants to fill a "labor shortage," remember what you are hearing: a cry for a labor subsidy to allow the employer to avoid the normal functioning of the labor market" (Weinstein, 2006, p. 2). Foreign nurses often receive free education in their home countries, providing an unfair competitive advantage over domestic nurses and further unbalancing the free labor market.

Subsidies may be politically appealing, but they override market forces of supply and demand (Browning & Zupan, 1999). The application of education subsidies for physicians has also been controversial and clearly such subsidies do not always accomplish what they were meant to accomplish. For example, Cooper and Aiken (2001) evaluate in detail the consequences of complicated government subsidies aimed at manipulating the supply of physicians through Medicare reimbursement of resident physician salaries and funds for medical school faculty. In the early 1990s this resulted in a surplus of family practice physicians and a shortage of specialty physicians (Cooper & Aiken, 2001).

The most significant effect of nursing education subsidies has been to lower the overall cost of the nurse supply, and whenever the cost of supply is lowered then compensation is lowered (Usher, 2003). When compensation is lowered, nurses and other segments of the workforce are attracted to other occupations and a shortage in the nursing segment results. If the aim of policymakers is to drive down nurse wages while providing a supply trickle of less-expensive new graduate nurses then current or increased subsidy policies are just right.


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