SINCE THE CURRENT SHORTAGE OF

CNE Objectives and Evaluation Form appear on page 67. Peter I. Buerhaus David I. Auerbach Douglas O. Staiger Recent Trends in the Registered Nurse Labor Market in the U.S.: Short-Run Swings on Top of Long-Term Trends Executive Summary An economic analysis of the nursing labor market reveals the short-term effects of changes in nursing wages and the overall level of unemployment on the number of nurses willing to participate in the workforce and the number of hours they are willing to work. Using data from the Current Population Surveys, the number of employed RNs has risen steadily for several decades, then, rose rapidly during 2002-2003, and declined in 2004-2005. In 2002-2003, nursing wages increased significantly while national overall unemployment reached a recent high of 6%, causing positive substitution and pure income effects. Foreign-born nurses account for 30% of the growth in RN employment over the past few years, but their numbers peaked in 2004 and dropped significantly in 2005 perhaps due to visa expirations. While economic and non-economic factors will continue to effect short-term participation, long-term projections predict a workforce of increasingly older and foreign-born RNs. SINCE THE CURRENT SHORTAGE OF registered nurses (RNs) began in the United States in 1998, the performance of the nurse labor market has attracted growing scrutiny by a wide range of industry and professional organizations, policymakers, researchers, and the media (Altman, Clancy, & Blendon, 2004; American Hospital Association [AHA], 2002; Antonazzo, Scott, Skatun, & Elliott, 2003; Buerhaus, Staiger, & Auerbach, 2000b; Institute of Medicine, 2004; Joint Commission on Accreditation of Healthcare Organizations, 2002). The current shortage peaked in late 2001 when average national hospital RN vacancy rates were estimated at 13% and hospitals reported 126,000 unfilled full-time equivalent RN positions (AHA, 2001; First Consulting Group, 2002). Although national vacancy rates dropped to an estimated 8.5% in late 2005, many hospitals continue to struggle with shortages of RNs (AHA, 2006). In fact, independent national random sample surveys conducted in 2004 and 2005 found that a majority of RNs (82%), physicians (81%), hospital chief PETER I. BUERHAUS, PhD, RN, FAAN, is Valere Potter Distinguished Professor of Nursing, and Director, Center for Interdisciplinary Health Workforce Studies, The Institute for Medicine and Public Health, Vanderbilt University Medical Center, Nashville, TN. DAVID I. AUERBACH, PhD, is Principal Analyst, Health and Human Resources Division, Congressional Budget Office, Washington, DC. DOUGLAS O. STAIGER, PhD, is Professor of Economics, Department of Economics, Dartmouth College, Hanover, NH, and Research Associate, National Bureau of Economic Research, Cambridge, MA. NOTE: The views expressed in this paper are those of the authors and should not be interpreted as those of the Congressional Budget Office. The authors reported no actual or potential conflict of interest in relation to this continuing nursing education article. ACKNOWLEDGMENT: This study was funded by a grant from the Johnson & Johnson Campaign for Nursing s Future. Johnson & Johnson played no role in the design and conduct of the study, analysis and interpretation of results, and preparation or approval of this manuscript. We appreciate the research assistance provided by John Buerhaus. 59

executive officers (68%), and chief nursing officers (74%) perceived a nursing shortage in the hospitals where they admitted patients or were employed (Buerhaus, Donelan, Ulrich, DesRoches, Norman et al., 2007). Survey respondents also perceived the shortage had negatively impacted various indicators of care delivery processes, hospitals capacity to provide services, RNs ability to provide patient care, and on the Institute of Medicine s six aims for improving the quality of health care systems. In this article, we describe recent trends in the nurse labor market in the United States. Because RNs compose the largest group of nurses in the nursing workforce, we concentrate on the labor market activity of the current supply of RNs. Additionally, we focus on hospitals where the majority of RNs are employed. Among our findings, we identify and discuss changes in RN earnings and employment over the past 4 years, and provide updated information on the long-term trends involving the growth in employment of older and foreign-born RNs. Drawing from labor economics, we begin by providing background information that is intended to provide both the context for and a deeper understanding of recent observed changes in the nurse labor market. Specifically, we distinguish between the short and long-run supply of RNs, and then explain how economic forces determine RNs decision to be active in the labor market. This is followed by a brief description of the data used to determine trends in RN earnings and employment. Next, we present and explain these trends, and conclude by offering some discussion about how the nurse labor market may change in the coming years. Short-Run vs. Long-Run Supply of RNs Our focus is on the labor market activity of currently existing RNs or, as economists say, the Recent Trends in the Registered Nurse Labor Market in the U.S. short-run supply of RNs. If we are interested in increasing the supply of RNs to help resolve the existing shortage of nurses, any increase in supply will come initially from increasing the participation in the workforce from current RNs or, if they are already working, increasing the number of hours these already available RNs are willing to work (or both). Changing the short-run supply of RNs can be accomplished by manipulating the factors that already existing RNs consider when deciding whether to participate in the nurse labor market and deciding on the number of hours they are willing to work. Conversely, because it takes between 2 and 4 years for an individual to complete basic nursing education once she/he decides to become a RN, the long-run supply of RNs refers to the number of RNs that will be potentially available at some time in the future. Thus, an expansion of the long-run supply of RNs will not address a shortage of RNs that is being experienced today, but may help prevent a future shortage from developing. Among the major factors that determine the long-run supply of RNs are the size of the population of individuals who could decide to become RNs, the propensity of these individuals to choose a nursing career, price (tuition) of obtaining a nursing education, attractiveness of other careers, wages in the nurse labor market (as wages rise, more people would be willing to pursue a nursing career compared to when wages are not increasing), and the capacity of nursing education programs. Over the past several years, much attention has focused on the capacity of education programs as shortages of faculty and both classroom and clinical space have resulted in thousands of qualified applicants being turned away from nursing education programs (American Association of Colleges of Nursing, 2005; National League for Nursing, 2004). Consequently, given these capacity constraints, the long-run supply of RNs will not be as large as might otherwise be the case. In this analysis, we are concerned with the labor market behavior of the current or shortrun supply of RNs those RNs who exist today versus those who will be available in the future. Our interest is to examine, exclusively, the economic factors that determine existing RNs decisions to participate in the labor market and how many hours they spend working. To be sure, economic forces are not the only factors that determine these decisions; non-economic factors, such as characteristics of the job, quality of the workplace climate, demands on an RN s time by children or aging parents, the age of the RN, enrollment in an education program, and other non-economic factors also influence RNs employment decisions. However, because the influence of many of these noneconomic forces are discussed elsewhere (Buerhaus, Donelan, Ulrich, DesRoches, Norman et al., 2007; Buerhaus, Donelan, Ulrich, DesRoches, & Dittus, 2007), we concentrate on describing how changes in two economic forces, RN earnings and RNs non-wage income, have impacted the performance of the hospital sector of the U.S. nurse labor market in the past several years. To fully appreciate how these economic forces operate, we explain how labor economists conceptualize how changes in wages and non-wage income affects RNs decisions about their labor market activity. Substitution and Income Effects Changes in RN wages and effect on RN labor market activity. The wage an employer pays an RN exerts an important influence on nurses decisions to participate in the labor market and on the number of hours spent working. Labor economists have well-developed economic theory which explains two effects, the substitution and 60

Recent Trends in the Registered Nurse Labor Market in the U.S. income effects, that arise when individuals experience a change in their wages (Ehrenberg & Smith, 2000). Not only are both the substitution and income effects elicited whenever wages change, but they operate simultaneously and exert an opposite influence on labor supply decisions. When RN wages increase, many but not all RNs find that it is worth their time to increase their labor market activity (participation and hours worked) as the increase in wages allows them to increase their overall wealth. The wage increase induces RNs to substitute some of their leisure or nonworking time and spend that time working in the labor market earning additional money. Another way to think of a wage increase is that it makes the decision not to work more costly because the RN is giving up more income. Hence, the substitution effect associated with a wage increase is conceptualized as exerting a positive influence on hours worked and participation. The opposite occurs when wages fall: the substitution effect induces RNs to spend less time working as the reduction in earnings makes time spent in nonlabor market activities more worthwhile (for example, taking care of their children, looking after parents who might be living in the RNs household, enrolling in education programs, or enjoying any number of leisure activities). The income effect also occurs whenever wages change. The income effect, however, exerts an opposite influence from the substitution effect on the labor market decisions of nurses. In the case of a wage increase, the income effect is negative, stimulating some but not all RNs to decrease their participation in the labor market and hours worked. In the logic of economics, a wage hike increases the RN s wealth, and the increase in wealth means an RN can consume more goods. One of the goods an RN can consume with this additional income is more leisure time (less time working). Thus, the income effect exerts a negative influence on the short-run labor supply decisions of RNs. The opposite occurs when wages decrease: the income effect induces RNs to spend more time working as the decrease in the RN s wage reduces the ability to consume more leisure time. Thus, whenever wages increase, two opposing forces the positive substitution and the negative income effects interact and influence the decisions of RNs to participate in the nurse labor market and the number of hours worked. Unfortunately, it is impossible to know in advance which effect will dominate. Many studies have been conducted to determine which effect is more powerful, with the majority concluding that the substitution effect dominates; raising wages is positively associated with increases in participation and hours worked (Antonazzo et al., 2003; Shields, 2004). However, most studies find that this net effect is not very strong, meaning that it would take a very large wage increase to induce a moderate increase in either participation or hours worked. How one goes about estimating the substitution and income effects associated with changes in RN wages is described elsewhere (Buerhaus, 1991a, 1991b). Changes in non-wage income on RN labor market activity, the pure income effect. From an economic perspective, in addition to wage changes, the decisions by existing RNs to participate in the labor market and the number of hours worked are influenced by other economic variables (for example, income from investments, alimony payments, etc.) that contribute to the total wealth of the RN s household. For the vast majority of RNs, the income of their spouses provides the major source of a RN s non-wage income. Specifically, when the spouse of an RN receives a wage SERIES increase or is confident his or her job is secure and is not worried about being laid off, the economic wealth and security of the RN s household is increased. This increase in non-wage income and overall economic security stimulates some, but not all married RNs, to reduce not only the number of hours worked but may even encourage some married RNs to withdraw from the labor market all together. Economists refer to the effect of an increase in the income of the RN s spouse as a pure income effect on the labor supply decisions of RNs. One might think of the pure income effect as what is likely to occur if an RN were to win a lottery or receive a large inheritance: the increase in wealth, which came from sources other than changes in her own wages, stimulates some but not all RNs to quit working. In contrast, when the spouse of an RN has not received a wage increase, lost his or her job or is worried about losing employment, the non-wage income and economic security of the RN s household is decreased. Consequently, the loss in non-wage income induces some married RNs to decide to re-enter the labor market if they are not currently working, or those who are already employed may decide to increase the number of hours worked by working overtime, shifting from part to full-time status, or even deciding to work a second job. Most economic studies conclude that increasing RN spouse wages exerts the expected negative effect on the labor supply of married RNs. According to a comprehensive review of 16 studies conducted from 1970 to 2003 by Shields (2004), RN s spouse wages exerted a stronger influence on reducing the RN s participation in the labor market compared to decreasing the number of hours worked by RNs who were already participating. In addition, one study (Link & Settle, 1981) reported that older RNs were the most 61

responsive to changes in their non-labor income. The influence that non-wage income exerts on married RNs labor supply decisions is described in greater conceptual and empirical detail elsewhere (Buerhaus, 1991a). Because approximately three out of four RNs are married, changes in the economic well-being of RNs spouses (the RNs non-wage income) exert an important effect on the employment decisions of many RNs (Brewer et al., 2006; Buerhaus, 1991a, 1991b; Shields, 2004). Unfortunately, data on the economic well-being of RNs spouses are not readily available and, therefore, it is necessary to use other measures to gage this effect, such as the rate of unemployment in the national economy. Unemployment rates provide a useful surrogate measure of yearly changes in the economic security of RN households across the nation (Buerhaus, Staiger, & Auerbach, 2003, 2004). In sum, RNs decisions about their employment activity are determined by changes in their wages and non-wage income. Changes in wages elicit two opposing forces: the substitution and income effects. Because so many RNs are married, changes in non-wage income associated with their spouses earnings and employment security also exert a powerful impact on the employment decisions of RNs in the nursing workforce. With this background on the underlying economic effects associated with changes in RN wages and non-wage income, we now describe the source of data used to examine recent trends in RN earnings and employment in the U.S. labor market. Data Data for this study come from Current Population Surveys administered from 1983 to 2005. The CPS is a household-based survey Recent Trends in the Registered Nurse Labor Market in the U.S. administered monthly by the Bureau of the Census, and is widely used by researchers and by the Department of Labor to estimate current trends in unemployment, In sum, RNs decisions about their employment activity are determined by changes in their wages and non-wage income. employment, and earnings. The survey covers a nationally representative sample of over 100,000 individuals, and every month 25% of the sample is asked detailed questions about current employment status, hours worked, earnings, occupation, and industry employed, etc. The CPS provides a large representative sample of nursing personnel across many years and we have used these data in prior work to construct and analyze national estimates of annual RN employment, earnings, and other indicators of the RN labor market, as well as the demographic composition of the RN workforce (Buerhaus & Staiger, 1996, 1999). Data used in this analysis included all individuals between the ages of 23 and 64 who reported their occupation as a RN between January 1973 and December 2005 (N=86,568). Individuals outside of this age range were excluded for consistency with our earlier work, but they compose less than 3% of the RN workforce and excluding them has no material effect on the analysis. Hourly wages were calculated as usual weekly earnings divided by usual weekly hours. The CPS earnings question includes overtime pay, but not bonuses, signing fees, or other non- wage benefits. Thus, while the wage does not capture all changes in compensation, it should be representative of overall trends. Wages were adjusted for inflation using the Consumer Price Index for all goods in urban areas, and are reported in constant 2005 dollars. To be consistent with our earlier work, employment was measured as full-time equivalents (FTE) (the number of full-time employees plus one-half the number of part-time employees) where full-time employment is defined as working 30 or more hours per week. To make estimates representative of the U.S. non-institutionalized population, the data were weighted by sampling weights provided by the CPS. Recent Changes in Employment And Earnings Growth in the Nurse Labor Market in the United States The nurse labor market comprises all employers of RNs: hospitals, home care agencies, long-term care facilities, clinics and physician offices, schools, etc. Total FTE RN employment in the nurse labor market in the United States has been growing steadily for many decades. Recently, FTE RN employment grew from an estimated 1,987,389 in 2001 to 2,073,283 in 2002, an increase of nearly 86,000 FTE RNs (see Table 1). From 2002 to 2003, total FTE employment increased by almost 120,000 RNs. Thereafter, total employment fell slightly in 2004 (by 549 FTE RNs) and decreased even more noticeably in 2005, by 27,249. In hospitals, where the majority of RNs are employed (see Figure 1), recent changes in employment were more dramatic. In 2002, FTE RN employment increased sharply, rising 84,715, and in 2003 grew by an even greater amount, 98,765. This 2-year surge in hospital RN employment growth is the largest increase in over 2 decades and even led some observers of the nurse labor market to wonder if 62

Recent Trends in the Registered Nurse Labor Market in the U.S. SERIES Table 1. Changes in National Unemployment Rates, Inflation-Adjusted Wages, and Full-Time Equivalent (FTE) Registered Nurse (RN) Employment, 2001 to 2005 Year National Unemployment Rate Inflation-Adjusted RN Wage Growth FTE RN Employment Growth and Change (From Prior Year) Total Hospitals Total Hospitals 2001 4.7% 1,987,389 1,201,003 2002 5.8% 4.3% 5.0% 2,073,283 (85,894) 2003 6.0% 1.7% 1.8% 2,191,981 (118,698) 2004 5.5% -0.4% -0.5% 2,191,432 (-549) 2005 5.1% -0.3% 0.1% 2,164,183 (-27,249) 1,285,718 (84,715) 1,384,482 (98,764) 1,378,116 (-6,366) 1,326,91 (-51,202) the current nursing shortage was coming to an end (Buerhaus et al., 2003). This growth in hospital RN employment, however, proved to be short-lived as FTE RN employment in hospitals fell by more than 6,000 in 2004 and by more than 51,000 in 2005 (see Table 1). Explaining the recent rise and fall of hospital RN employment. As shown in Table 1, national unemployment rates increased from 4.7% in 2001 to 5.8% in 2002. In 2003, the unemployment rate increased once again, reaching 6%. These consecutive increases in unemployment rates meant that many spouses of married RNs had lost their jobs or were worried that they might in the near future. Consequently, many married RNs more than likely experienced a decrease in nonwage income and felt economic pressure to increase their activity in the nursing workforce (a positive pure income effect). Also, during this same 2-year period, inflationadjusted RN wages increased substantially, adding another economic stimulus (a positive substitution effect) for RNs to increase their labor market activity (see Table 1). Thus, in 2002 and 2003, two economic forces rising unemploy- Figure 1. Employment Growth of Full-Time Equivalent (FTE) Registered Nurses (RNs) in the United States by Age, 1983-2005 1,600,000 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 0 FTE RNs in Hospitals and in Other Settings 1983 Hospital FTEs 1986 1989 1992 Year 1998 Non-Hospital FTEs 2001 2004 63

Table 2. Total Employment Growth of Full-Time Equivalent (FTE) Registered Nurses (RNs) by Age, 2002-2005 Employment Growth by Age of FTE RNs Year 21-34 years 35-49 years 50-64 years 2002-21,170 43,152 63,911 2003 87,131-32,271 65,839 2004-45,034 21,294 23,212 2005-31,277-87,284 91,312 2002-2005 -10,371-57,109 244,273 Figure 2. Total Employment Growth of Full-Time Equivalent (FTE) Registered Nurses (RNs) by Age, 1983-2005 1,200,000 1,000,000 800,000 600,000 400,000 200,000 1983 ment rates and increasing RN wages (particularly in hospitals) combined to provide strong economic incentives for RNs to increase their labor market activity. Not surprisingly, full-time RN employment in hospitals increased substantially (approximately 185,000 FTE RNs) during this 2-year period. In 2004 and 2005, these two economic forces reversed direction as both national unemployment rates and RN wages fell at the same time (see Table 1). Now the pure FTE RNs by Age Group FTEs, age 50+ FTEs, age 35-49 FTEs, age 21-34 1986 1989 1992 Year 1998 Recent Trends in the Registered Nurse Labor Market in the U.S. 2001 2004 income effect turned negative as did the substitution effect associated with the decrease in wages. Not surprisingly, in 2004 RN hospital employment dropped, falling by a little more than 6,000 RNs nationwide. In 2005, as national unemployment rates and RN wages fell again, RN employment decreased even more visibly, by more than 50,000 FTE RNs. As noted earlier, economic forces are not the only factors that RNs consider when making decisions about their labor market activity and, in fact, may be of little significance for many RNs. But for some RNs economic forces are important and when their decisions are summed over the entire workforce (over 2 million RNs), economic forces can have a substantial effect on short-term employment levels as these data suggest. Long-Term Changes in the Composition of the RN Workforce This analysis has concentrated on swings in the employment of current RNs in relation to changes in nurse wages offered by employers and by changes in RNs nonwage income implied by changes in unemployment rates in the broader economy. It is important to realize that the changes in RN employment and earnings we have discussed have occurred in the backdrop of more deep-seated trends transforming the RN workforce. In other words, while changing economic forces may impact year-to-year RN employment levels, they are but momentary movements in the current short-run supply of RNs that are occurring on top of longer-term forces that are steadily reshaping the composition of the supply of RNs. In fact, when we made our first projections of the future age and supply of the RN workforce (Buerhaus et al., 2000a), our estimates suggested that older and foreign-born RNs would increasingly become the main suppliers of RNs to the nurse labor market. The new CPS data on the RN workforce used in this analysis also allow us to track changes in the age and foreign-born composition of the RN workforce and to assess the degree to which these longer-term changes are occurring. Older RNs. As shown in Table 2, a very large proportion of the total employment growth of RNs during the past 4 years has come from RNs over the age of 50 years. In fact, employment growth of older RNs has been astounding, increasing by a little more than 244,000 FTE RNs between 2002-64

Recent Trends in the Registered Nurse Labor Market in the U.S. Figure 3. Percent of Full-Time Equivalent Registered Nurses Born in the United States, 1994-2005 19% 17% 15% 13% 11% 9% 7% 5% 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2005. Employment of middle-aged RNs (ages 35-49 years) increased in 2 of the 4 years covered in this analysis, but experienced a net decline of a little more than 57,000 FTE RNs over the past 4 years. Similarly, despite one strong year of employment growth (more than 87,000 in 2003), employment of younger-age RNs (21-34 years) decreased in all other years, for a net decline of more than 10,000 FTE RNs. These trends in the aging of the FTE RN workforce have been developing over the past 2 decades as a consequence of the large baby-boom cohorts who entered nursing at unprecedented rates in the 1970s and 1980s (for a more complete discussion, see Buerhaus et al., 2000a). Data in Year Table 3. Employment Growth of Registered Nurses in the United States by U.S. and Foreign-Born Status, 2002-2005 Year United States Foreign-Born 2002 44,045 41,849 2003 94,503 24,190 2004-9,824 9,275 2005-5,897-21,353 2002-2005 122,832 53,962 Figure 2 reveal that the number of younger RNs peaked in 1987 when there were an estimated 628,000 RNs in this age group; since then, their number has fallen and in 2005 amounts to an estimated 491,000. In contrast, the number of middle-age RNs grew at a strong pace during the 1980s, slowed in the 1990s, and reached a plateau in the early years of the current decade. The slowdown in the growth of middle-age RNs occurred as an increasing number of FTE RNs reached their 50s. In fact, RNs over the age of 50 have become the fastest growing component of the RN workforce, expanding 11% annually over the past 4 years. Increasing proportion of foreign-born RNs. In addition to older SERIES RNs supplying the nurse labor market in recent years, the composition of the U.S. nurse workforce has become increasingly foreign-born. In 2005, 14% of the RN workforce was made up of foreign-born RNs (see Figure 3). The growth of foreign-born RNs increased nearly 42,000 in 2002, and rose another 24,000 a year later for a total growth of 66,000 during this 2- year period (see Table 3). In 2004, when hospital RN employment began to decline, employment of foreign-born RNs continued to grow, increasing by more than 9,000. However, in 2005, the number of foreign-born RNs in the United States dropped sharply, by more than 21,000. This drop may reflect the expiration of visas used to gain entry into the United States with the result that many foreignborn RNs had to leave the country. Furthermore, of the total decrease (51,202) in FTE RN hospital employment in 2005 (see Table 1), foreign-born RNs accounted for 13,000 of this decline. Despite the decrease in 2005, the rapid growth in employment of foreign-born RNs accounts for nearly one-third (30.5%) of the total growth of RN employment in the U.S. nurse labor market over the past 4 years. Note, however, that because the CPS data used in this analysis do not allow us to identify the subset of foreign-born RNs who actually received their nursing education outside of the United States, employment growth in this group does not solely reflect growth in the number of RNs immigrating to the United States. Concluding Comments Looking ahead to the next several years, changes in unemployment rates affecting RN spouses (which hospitals cannot control) and changes in the earnings of RNs (which hospitals can control) are likely to play an important role in determining overall employment levels in the nurse labor market. Depending on how these two economic forces change, they might 65

balance or cancel each other, or they could align in the same direction and reinforce their effects either positively or negatively on the nurse labor market, just as they have over the past 4 years. It is already known that during 2006 national unemployment rates continued to fall, reaching 4.6% at the time of this writing. The expected increase in an RN s non-wage income would give some current married RNs an economic incentive to reduce their labor market activity. But the number of RNs who actually leave the labor market or decrease their hours worked also will be determined by whether hospitals raise wages in 2006. If RN wages increase, this would counter (to some unknown extent) the negative effect of falling unemployment rates on participation and hours worked. If wages do not increase, the likely result will be that falling national unemployment rates will lead to a further decline in RN employment during 2006. 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