From certification to licensure: evidence from registered and practical nurses in the United States, 1950-1970.

• Author: Law, Marc T.
• Position: Special issue on: "The comparative economics of regulated professions" - Report

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. Since the late nineteenth century there have been two types of nurses in the United States: registered nurses and practical nurses. Registered nurses possess more education and training than practical nurses. Indeed, practical nurses often work under the supervision of registered nurses. Regulation of these two professions, like most occupational regulation in the United States, is at the state-level (Kleiner 2006). We examine these two occupations in order to take advantage a quasi-experiment afforded by the fact that, by the beginning of our sample (the 1950 census for registered nurses; the 1960 census for practical nurses), all states already had certification in place (and some already required a license) but during the subsequent decade several states switched to a mandatory licensing regime while others did not. (5) Accordingly, we infer the effect of licensure in a difference-in-differences framework that uses states that did not change their regulatory regime as a control. We investigate the effects of this shift from certification to licensure using individual-level census data. Our goal is to uncover the effect that this shift had on wages and participation in the two nursing professions. Our approach is methodologically superior to some of the existing literature on the effects of nurse occupational licensure on wages and participation (for instance, Monheit 1982) that only use cross-sectional data. An advantage of a difference-in-differences research design is that it allows us to better control for unobservable time-invariant, state-specific, factors that might affect the nursing profession.

   Our investigation of the wage and participation effects allows us to distinguish among the three competing hypotheses regarding the effect of mandatory licensing in an environment where certication is already in place. If licensing reduces welfare because it is anti-competitive, wages should rise and participation should fall in those states that switch from certification to licensure relative to a control group of nonswitching states. If licensing fosters trust and increases both the demand and supply for professionals, participation should rise but the effect on wages is ambiguous. Finally, if licensing has little to no effect on welfare because the market for professional services was not sufficiently segmented to begin with, then neither wages nor participation should change after the introduction of mandatory licensing.

   This investigation is important because we believe ours to be among the few studies that examine the effects of a shift to mandatory licensure in an environment where government certification is already in place. Most scholarship on the wage and participation effects of professional regulation examines the effect of regulation relative to no regulation at all (for a survey of this literature see Kleiner 2006). Alternatively, wages and participation are compared across regimes among which licensing is already in place but the "strictness" (variously measured) of licensing differs (see, for instance, Kleiner and Kudrle 2000). Given that, in many instances, professional regulation evolves in stages, it behooves us to examine the effects of the intermediate stages in the evolution of these regulations.

   We recognize that this study is not "comparative" in the usual sense that is implied by the term comparative economics, and therefore may seem an odd contribution to a special issue of a comparative economics journal. Nevertheless, we believe that our paper will be of interest to the readership of this journal. First, occupational regulation in the United States, like many federal countries, is at the sub national level. Accordingly, our study may offer lessons for other federal countries like Canada and Australia, where some professions are regulated at the level of provinces or states. Indeed, variation across US states in professional regulation is not dissimilar to variation across European Union countries, given that professional regulations do still vary within the EU, in spite of efforts to integrate labor market standards across member nations. Second, the nursing profession in the US is similar to many other countries in that it is separated into two tiers that face different regulatory standards, both of which we study: first tier nurses ("registered" nurses) and second tier nurses ("practical" nurses). According to data presented by Robinson and Griffths (2007), the nursing professions in Belgium, Finland, Germany, the Netherlands, Sweden, Australia, Canada, Japan, and New Zealand are also divided into two tiers that face different regulatory standards. As part of our empirical analysis we examine whether mandatory licensing of one nursing profession affects wages and participation in the other.

   The remainder of this paper is structured as follows. We begin by describing our data set on registered and practical nurses. We argue that the shift from certification to licensure during this period constitutes a quasi-experiment that will allow us to make valid inferences about the effects of licensure relative to certification on wages and participation in the two nursing professions. We then turn to an empirical analysis of the impact of licensure on the wages and participation. This is followed by a conclusion.

2. Data

   State-level regulation of the two nursing professions began in the late nineteenth and early twentieth centuries, contemporaneously with the rise of occupational regulation of a wide variety of other professions (Law and Kim 2005). Historically, the introduction of occupational regulation of registered nurses preceded the regulation of practical nurses (Council of State Governments 1952; White 1979, 1983). Regulation of the two nursing professions has evolved in stages, diffusing gradually across states and also becoming stricter over time. This...