This paper will explore two of Mankiw’s (2001) “ten principles of economics” (p. 3) and how these apply to the labor market for nurses. The paper will briefly discuss the two principles: a) “No. 1 People Face Tradeoffs,” (p. 4-5) and b) “No. 7 Governments Can Sometimes Improve Market Outcomes” (p. 11). Afterwards, the paper will discuss how the State of New York calculates nursing wages considering the two principles.
First, the said discussion will identify the factors that could influence the supply and demand for nurses. Second, it will discuss how a nurse’s pay is determined and how the salary is structured. Third, it will provide recommendations on how the State of New York can increase its supply of nurses. Finally fourth, it will summarize how Mankiw’s two principles basically apply to the labor market for nurses.
The two economic principles this paper centers on belong to Nicholas Gregory Mankiw, chairman of President Bush’s Council of Economic Advisers from 2003 to 2005. Principle No. 1, People Face Tradeoffs, refers to the situation when people have to choose one activity or thing over another (p. 4-5). This principle states that people’s choices affect efficiency and equity (p. 5). Mankiw defines efficiency as: “how huge the pie people create” or essentially the wealth that a society produces while equity is “how the pie is divided” or the redistribution of the wealth that the society has created (p. 5).
Meanwhile Principle No. 7, Governments Can Sometimes Improve Market Outcomes, refers to the imperfect actions of government to manage a society’s efficiency and equity (p. 11). Government actions can result to market failure due to externalities and market power (p. 11). On one hand, externalities can either be good or bad (p. 11). It refers to the unintended results of a particular action in pursuing a certain purpose (p. 11). On the other hand, market power refers to the influence of a person, sector, or society due to limited supply or great demand on a particular thing or service (p. 11).
Speaking of service, this paper will next explore the nursing service in the state of New York, then in the entire U.S.A. Brewer and Kovner (2000) identified several factors that influence the supply for nurses in New York. According to the two authors, the factors that affect supply are: a) “negative real wage growth from 1989 to 1996”; b) decreasing “admissions and enrollments in nursing programs”; c) “decrease in licensed nurses”; and d) “aging and retirement of registered nurses or RNs.” Meanwhile, the U.S. Department of Health and Human Services (2003) identified the following factors that influence the “continuing decline of nursing graduates” nationwide: a) “increasing professional opportunities for women outside nursing”; b) “stagnant pay and more onerous working conditions for many in nursing”; and c) “a decline in pubic perception of the attractiveness of the nursing profession.”
For the demand-side, the U.S. Department of Health and Human Services noted that: “The U.S. Census Bureau projects a rapid increase in the elderly population starting around 2010 when the leading edge of the baby boom generation approaches age 65.” Hence, the department concludes: “…the rapid growth in demand for nursing services is especially pronounced for long-term care settings that predominantly provide care to the elderly.”
Next in the discussion are: a) how a nurse’s pay is determined, and b) how the salary is structured. Brewer and Kovner (2000) pointed out that: “Hospitals are having significant difficulty financially due to the Balanced Budget Act and state legislation.” The authors also concluded: “Funding changes that effect hospital financial viability will significantly influence the balance of supply and demand.” Moreover, Brewer and Kovner (2000) observed and opined: “Current shortages are relatively localized and moderate in severity, and if hospitals achieve sufficient financial relief politically they may abate.”
With these evidences, government essentially determines a nurse’s pay. As for how RN salaries are structured, Brewer and Kovner (2000) suggested that: a) great demand versus limited supply; b) experience; c) specialized skills; and d) regional demand variations led to: “1) ease with which new graduates are finding employment; 2) organizations offering sign-on bonuses; 3) anecdotal and news reports; 4) focus group reports, and 5) surveys of employers which indicate difficulty hiring RNs.” The said factors essentially determine how RN salaries are structured.
Thirdly, due to the factors previously identified and discussed, this paper recommends that the State of New York increase its supply of nurses thru: a) recruitment of RNs from abroad, and b) encouragement of retirement homes abroad in countries with sufficient supply of RNs that are acceptable to the U.S. or those that can comply with U.S. standards.
Finally, this paper notes that Mankiw’s first and seventh principles have a profound effect on the supply and demand of nurses, RN pay, and RN salary structures. One, based on the data previously discussed, the U.S. shortage in RNs could be attributed to two major factors: a) State legislation and the Federal government’s Balanced Budget Act which essentially reduced the RN supply, and b) the retirement of baby boomers and their great demand for health care.
Note that both factors relate to government policies or decisions. Specifically, Roosevelt’s New Deal triggered the baby boom generation while Reagan pushed for the Balanced Budget Act. Two, due to the said government policies which were intended to manage efficiency and equity, the U.S. DHHS observed that people made choices that affected the supply and demand for nurses. This trend shows how positive and negative externalities came into play and determined the current market power of RNs.
Brewer, C.S. & Kovner, C. (2000). “Abstract: An Evaluation of the Supply and Demand of Registered Nurses in New York State.” Gateway, National Library of Medicine. Retrieved July 14, 2007
Mankiw, G. (2001). “Ten Principles of Economics.” Principles of Microeconomics Second Edition. Fort Worth, TX: Harcourt College Publishers. pp. 3-15.
U.S. Department of Health and Human Services. (2003). “What is Behind HRSA’s Projected Supply, Demand, and Shortage of Registered Nurses?” Health Resources and Services Administration. Retrieved July 14, 2007