Direct and Indirect Consequences of Legislating Labor Demand in the Hospital Sector

Health care systems struggle to guarantee high-quality and highly reliable care, with limited improvements to date. One commonly advocated ingredient for ensuring hospital quality is a robust nursing staff. Registered nurses (RNs) comprise nearly 3 million members of the US labor force, and patients’ perceptions of their experiences with medical care seem strongly influenced by their interactions with nurses. Additionally, a recurring association in the literature is the inverse relationship between nurse staffing levels and adverse health outcomes in hospitals. Despite the prevailing notions that a stronger nursing workforce directly benefits both health care consumers and employers, hospitals are known for high rates of “burnout” and labor turnover—leading to a distaste for hospital-based work among some nurses. If market forces are insufficient to drive optimal levels of nurses, then public policy may be necessary to force an alignment.

Such a regulatory response was the path chosen by California when it introduced strict nurse staffing requirements for all hospitals in the early 2000s. The law aimed to improve market function in terms of care quality but has the potential to alter, if not distort, other market dimensions—namely the labor market for nurses. Regulation is generally a blunt instrument and can therefore generate intended as well as unintended effects on local firms and product markets.

At this time, the two existing studies that narrowly focus on nurse wage changes in California offer conflicting findings. To better understand the consequences of using legal measures to correct perceived health care market failures, we leverage this quasi-natural experiment, along with detailed nursing workforce data from all US states (1988 – 2008), to estimate the causal effects of a staffing mandate on wages and labor market outcomes. Our estimation strategy also improves upon existing studies of the California law by allowing for a flexible treatment window that encompasses both policy announcement and enforcement—as both can drive changes in local labor market dynamics.

We find novel and strong evidence of a positive wage effect, which draws more nurses to the state and generates important spillovers onto non-hospital employment settings. Furthermore, non-hospital employers actually have to raise nursing pay by a relatively greater degree to ultimately match prevailing hospital wages after the mandate—consistent with the law eliminating a compensating wage differential between employment settings. The differential wage increases for California also persist years after state legislators intervened. However, the new equilibrium wages in California do not obviously spillover onto other states’ wage setting behavior.

Ongoing analyses are leveraging extensive and detailed federal employment data to investigate any spillover effects on VA employed nurses in California, specifically. VA health care facilities received more flexible wage setting authority for nurses many years earlier, so if our documented wage effects in the workforce survey data are correct, then we would expect to see similar compensation changes within these granular VA nursing data. Such a policy consequence would also underscore the spillover implications of the law since it would imply higher nursing labor expenditures for the federal government.