Optimal wages in the market for nurses: an analysis based on Heyes' model

In a recent paper "The economics of vocation or 'why is a badly paid nurse a good nurse?"' Anthony Heyes posits a novel adverse selection mechanism whereby the average quality of nurses employed is declining in the wage, and evaluates the consequences for an optimizing monopsonistic National Health Service (NHS). I conduct a standard welfare analysis here, based on the proposed model. It turns out that, contrary to concerns raised by Heyes, the NHS will always choose a wage that is lower than the wage chosen by a welfare-maximizing social planner. Nurse are underpaid. I also extend the analysis to the case of a competitive labor market for nurses.