Academic journal article The European Journal of Comparative Economics

From Certification to Licensure: Evidence from Registered and Practical Nurses in the United States, 1950-1970

Academic journal article The European Journal of Comparative Economics

From Certification to Licensure: Evidence from Registered and Practical Nurses in the United States, 1950-1970

Article excerpt

1. Introduction

In Chapter 9 of Capitalism and Freedom, Milton Friedman discussed how government certification (sometimes called "voluntary licensure") and mandatory licensure function as alternative mechanisms for solving the asymmetric information problem about professional quality. The key distinction between certification and licensure is that licensure imposes a strict entry barrier but certification does not. Under government certification, the state (usually in concert with professional associations) determines what it takes to be "certified" but any individual may practice that occupation regardless of whether they meet the certification requirements. (3) In contrast, a licensure regime mandates that all practioners meet the government's requirements, which normally include satisfying minimum educational or training requirements and passing a licensing exam. Those who do not comply with the government's regulations are excluded from participation. (4) For many professions, mandatory licensure has

Among economists and policy makers there is some debate regarding the welfare effects of a shift from certification to licensure. One view, which has been advanced by Friedman (1962) among others, is that licensing reduces welfare relative to certification. A certification regime sends a signal about professional quality because only certified practitioners can claim certification but this does not allow the profession to establish monopolistic control over entry. Practitioners who are not certified may continue to operate and supply their services to consumers who do not wish to pay a premium for a certified professional. Licensure, on the other hand, facilitates monopolistic control over entry because competition from those who do not meet with the regulatory requirements is foreclosed. Unlicensed professionals are shut out of the market and consumer choice is reduced for those who are unwilling to pay the premium for a licensed professional.

A second view is that licensure increases welfare relative to certification. According to proponents of this view, an advantage of licensure is that it imposes discipline on a profession. Under licensure, failure to behave according to professional standards is punished harshly through the loss of the right to practice. In contrast, under a certification regime, professionals who do not perform according to the standard merely lose their certification, and hence, only lose the right to charge a premium associated with certification. Arrow (1963) has argued that the strict discipline imposed by licensure fosters "trust," which, in turn, increases both the demand and supply of professional services and raises welfare. Certification may be insufficient as a solution to the asymmetric information problem if it is not easy for consumers to distinguish among certified and uncertified practitioners.

A third possibility is that licensure will have no impact on efficiency. Implicit in the argument against licensing is an assumption that the demand for professional quality is heterogeneous, or, in other words, that given the information provided by certification, the market segments into those that are certified and those that are not. In this setting, mandatory licensing, by shutting down the lower-end of the market, prevents market segmentation, reduces competition, and lowers economic efficiency. If, on the other hand, certification provides information that is demanded by most consumers (i.e. if few consumers, when given the choice, opt to go to an uncertified professional), then a move from certification to licensure will have little effect on welfare because the market was not segmented in the first place. To the extent that licensing simply renders mandatory the certification that was already supplied by most practitioners, licensing will have no anti-competitive effects relative to certification, and welfare is not affected.

In this paper we use data from American states to examine the consequences of the move from certification to mandatory licensure for two occupations. …

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