Monopsony in the Low-Wage Labor Market? Evidence from Minimum Nurse Staffing Regulations

Abstract

This paper provides direct evidence on the extent of monopsony power in the low-wage labor market by estimating the firm-level elasticity of labor supply for several types of nurses in the long-term care (nursing home) industry. In 1999, California passed legislation requiring all licensed nursing homes to employ a minimum number of nursing hours per patient in an effort aimed at improving the quality of patient care. The law created pressure for firms below the mandated threshold to increase nurse staffing levels, whereas firms initially in compliance faced no such pressure. The paper documents that firms with low initial staffing levels greatly increased their employment of nurses, primarily by hiring relatively low-skilled nursing assistants. Consistent with a perfectly competitive model of the labor market, where firms face a perfectly elastic labor supply curve, growing firms did not have to raise their wages in order to hire more workers. The finding of negligible monopsony power in the market for nursing assistants – a result at odds with some recent other findings – adds interesting texture to the growing body of work on imperfect competition in labor markets and has important implications for active labor market policies such as the minimum wage.