Health Practitioner Bonuses and Their Impact on the Availability and Utilization of Primary Care Services. 2. Effects of Earnings on Labor Supply of Health Care Workforce


Consistent with the economic theory a large number of studies find evidence in support of a positive correlation between earnings and the labor supply of the health care workforce. This is in contrast to much earlier studies that relied only on aggregate time series data on physician services and fees to conclude that physician labor supply functions were backward-bending and physicians responded negatively to wage increases.22 For instance, Steiger et al. (2010) observe that inflation-adjusted physician fees (weighted average of Medicare and private sector fees) decreased substantially between 1995 and 2005. The timing of the reduction in fees closely matched the observed decline in non-resident physician work hours. The study finds that the mean hours worked per week by physicians practicing in the US decreased by almost 7 percent between 1996 and 2008. Additionally, by 2006, physician fees were 25 percent lower than their inflation-adjusted 1995 levels. More recent studies, which use micro data to estimate traditional labor supply equation, generally find a small positive elasticity of physicians’ work hours with respect to wage increases. For instance, Rizzo and Blumenthal (1994) use the instrumental variable approach to estimate the unbiased effect of physician’s wage on the annual hours the physician spends on patient care. Their results based on all physicians suggest that a 10 percent increase in the wage rate yields a 2.7 percent increase in the physician’s annual work hours (i.e., wage elasticity of 0.27). When restricted to self-employed male physicians, they find a wage elasticity of 0.23. However, for female physicians they find a higher elasticity, with a 10 percent increase in the wage rate leading to a 4.9 percent increase in annual work hours. This work is generally supported by Baltagi et al. (2005) who find that a 10 percent wage increase would lead to a 3 percent increase in physician labor supply among hospital employed male physicians in Norway. Baltagi et al. (2005) note that the magnitude of the wage elasticity in this case may be relatively small because of hospital employed physicians’ tendency to earn a lower wage relative to self-employed physicians.23

There are few studies that examine the effect of earnings on a physician’s decision to retire. Using micro data from Norway over the period of 1990-1992, Herneas et al. (2000) estimated a model to predict retirement behavior and simulated the effect of financial incentives on retirement decisions among those who were eligible to retire early (during 1990 - 1992) and who worked full-time in 1990. In their simulation, the annual pension from 1993 onwards is increased by 7.2 percent if the retirement eligible individuals continue to work full-time through 1992. This increase is equivalent to a 72.3 percent increase of the annual disposable pension.24 The simulation result suggests that the average estimated probability of continuing to work full-time throughout 1992 will increase by almost 100 percent (from 38.4 percent to 70.6 percent) in response to the 72.34 percent hike in annual disposable pensions described above.25 In other words, in the absence of any pension hike after 1993, only 38.4 percent of physicians working full time in 1990 would still work full time through 1992. However, if pension is raised by 72.3 percent from 1993 onwards for those who would continue to work full time through 1992, the simulation shows that 70.6 percent of physicians working full time in 1990 would still do so through 1992. They also estimated that the same financial incentives will lower the average estimated probability of partial retirement in 1992 (of retirement eligible workers) by about 54.7 percent (from 36.2 percent to 16.4 percent). Additionally, they find that other decisive factors influencing retirement decisions are the level of education, income, and marital status.

22 For an in-depth exposition of the empirical evidence and lack of support for a backward-bending physician labor supply, pleas e see Handbook of Health Economic, Vol 2, Chapter 14, Section 3.10

23 The nature of labor supply for Physicians and nurses differ greatly. There are some studies on the effect of wages on the labor supply of nurses. For example, Askildsen and Baltagi (2002) estimates a wage elasticity of nurses’ supply of labor between 0.7 and 0.8 depending upon the method of estimation. The authors argue that while theirs is a larger effect than other estimations have suggested it is still not a large effect relative to other professions. They also note that contract structure and type of work being performed significantly impact labor supply decisions and should not be ignored.

24 Wealth is defined as the discounted value of future annual disposable pensions and the increase in wealth is evaluated at the means of the data.

25 The expected remaining lifetime was then set at 18 years, which is close to the actual average for people in the relevant age groups in 1992.

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