As I discuss in my Health Economics class, hospitals are, in most places, the largest employers of nurses. With the nursing profession still dominated by women, often as second earners in their household, nurses tend to be less mobile than many other professionals. In addition, in many communities there are few hospitals within commuting distance, giving those hospitals in commutable distance what economists term as a “monopsonistic” position in wage determination.
A monopoly is a market type characterized by having only one seller or by a very dominant seller. A market that is monopsonistic, or simply a “monopsony,” on the other hand, is a type with just one buyer. The “mon” (from Ancient Greek “monos”) part of the word means “single,” while the “opsony” (from Ancient Greek “opsnia”) part means “purchase,” so “monopsony” means a single-purchaser market.
When a market has a single buyer, that buyer has an extraordinary amount of bargaining power and can strongly influence the market price. To get more nurses, better pay and/or better benefits must be promised or the hospital will be unable to attract more people to be nurses at their hospital. That is, the supply curve of nurses is upward sloping, so if a hospital wants more nurses, they would have to increase nurses’ pay, new and incumbent nurses alike, or incumbent nurses may just quit to be rehired later at the higher pay. Or they may just make things difficult for the hospital administration that pays new nurses more than loyal workers.
Let’s look at a simple numerical example. Suppose that a hospital could attract and maintain a workforce of 500 nurses by paying them each $50,000 a year, for a labor cost of $25 million a year. Now suppose in order to increase this workforce up to 600, pay would have to go up to $60,000 a year to attract the next 100 nurses, often from greater distances. In this case, labor costs increase from $25 million to $36 million, or 44% more in labor costs for a 20% larger force. This is because both the additional 100 nurses had to be paid more, but so did the 500 incumbent nurses.
How can the higher pay be limited to just those new nurses without paying more to the existing nurses? This is where nursing contractors come in. The contractors work for someone else and usually commute great distances. The pay is higher for the contract nurses and the hospital’s nurses do not revolt. In this case, the labor costs are the $25 million for the hospital’s 500 nurses and another $6 million for the contract nurses, pushing costs up to only $31 million instead of $36 million, or by 24%, not much more than the increase in nurses.
This past Saturday I, along with some colleagues and a student of mine from Nicholls, attended the Louisiana Political Science Association meeting at the Grambling State campus. The meeting was helpful and very cordial, even though many of us strongly disagreed with one another.
There was a panel of undergraduate papers with two papers from Centenary students (my student and I presented a joint paper with Dr. Sanders in another session). There was another panel of graduate student papers. Both of these undergraduate papers were very interesting. Allison Saylor an undergraduate student at Centenary had a nicely done paper titled ““The Bush Administration, Private Military Contractors, and the War on Terrorism,” in which she examined the substantial growth in the use of military contractors in the war in Iraq. She posed a very useful question, “why would the war in Iraq require so many more contractors than we saw in previous wars?” (Quote marks are used here for my interpretation of her paper rather than a quote from her.)
During the discussion period after her presentation, I think the presenters, discussant, session chair and the audience arrived at a reason for this large expansion of contractors. The last protracted war that the U.S. was involved in was Vietnam, and soldiers could be drafted then. Any “desired” expansion (by the Administration) was met by increases in the number drafted. To expand under a voluntary force, we need to either attract more soldiers by increasing their benefits or by outsourcing non-combat roles to civilians.
The latter solution, outsourcing to private contractors, is likely to be less costly for two reasons. Many of the non-combat requirements of a military force are things that many private sector companies are already doing and things where they have particular expertise, such as warehousing and goods distribution, food services, accounting services and construction. Soldiers are no better at doing these activities and are probably worse than trained civilians at these sorts of activities. While this was also true during earlier wars, these activities in those days could be manned with soldiers who were drafted and forced to work below their opportunity cost or their voluntary wage rate.
The other reason for outsourcing certain tasks often performed by soldiers is exactly analogous to the nursing monopsony story told above. The market for warriors is a monopsony market with the Department of Defense just about the only buyer in the market.
How can the higher pay be limited to just those new soldiers without paying more to the existing soldiers? The contractors fill certain non-combat roles, while the military personnel perform the combat roles. The pay is higher for the contractors, and the combat troops do not revolt.
While it might have been the case that certain contractors got sweetheart deals, no-bid contracts or cost-plus contracts, it is likely that troop increases with a voluntary force may have to increase pay to all rather substantially to get only a few more warriors.
I should point out that the return to the draft is not a solution to this high incremental cost of troop expansion, because the real opportunity cost of a draft is that some people are forced to do military jobs, often giving up positions where they are far more valuable to the country than as soldiers. This social cost of the draft is hidden from presidents, congressmen, taxpayers and voters and they often do not consider such costs in their decisions.
Finally,it is almost ironic that those who kill and those who heal face the same sort of labor market issues, and those who hire them face similar incentives to price or wage discriminate.
-MC
