<p>The appropriate role of government is to improve on free activity of the market by improving how the market works (ie fixing market failures). For skill certifications to be an appropriate role for government, such certification would have to be a public good, which would require that it creates a positive externality - a value given to someone that hasn't paid for it. </p>

<p>In the case of skill certification, there certainly is no positive externality. It's easy and in fact very often done in the free market. There are a myriad of certification programs, schools that give degrees, and tests you can take that provide some proof of skill. All of these things can be done with your usual buyer-seller relationship without any externalities happening. Therefore the government doesn't have a role to play there.</p>

<p>I wrote a whole article on the appropriate role of government, which might clarify things for you: <a href="https://governology.wordpress.com/2016/07/05/the-role-of-government-part-1/" rel="nofollow">https://governology.wordpress.com/2016/07/05/the-role-of-government-part-1/</a></p>

CC BY-SA 3.0
2016-07-05T10:59:36.740Z
Clearly moral hazard exists in the case of most certification programs. If there are two programs handing out a similar certificate to people who successfully complete the program they have an incentive to lower the bar of acceptance. Word would spread and more people would choose the easier program. The solution could be separating the teaching entity from the examining entity. Government does have a role to play here by providing the examining entity. (The actual solution is usually certifying the entity to make sure there are standards.)
Giskard
CC BY-SA 3.0
2016-07-05T11:02:48.960Z
An example of moral hazard would be bond rating companies which were much criticised for their role in the 2008 financial crisis. As it is explained in the big short the rating agencies are payed for their services and companies wishing to certify their bonds with a high rating can choose freely. This can lead to a competition in overrating bonds, resulting in adverse selection.
Giskard
CC BY-SA 3.0
2016-07-05T23:23:41.513Z
@denesp "Word would spread and more people would choose the easier program." Word would also spread about that program lowering its bar. Certificates from that program would lower in value accordingly. Moral hazard isn't a market failure, despite that widespread myth.
B T
CC BY-SA 3.0
2016-07-05T23:31:02.830Z
The problem with bond rating companies is that the government is charged with regulating their ratings. While the government theoretically controls what "AAA" means, for example, if they give agents (bond rating companies) the ability to give out rating, then they have created an artificial situation where externalities can occur - the escalating overrating of bonds. This is a government failure, not a market failure and shows clearly why there is no role for the government to play here. If the rating scale were owned by a single company, that company would have an incentive to keep up quality
B T
CC BY-SA 3.0
2016-07-06T07:36:11.037Z
Moral hazard is indeed not market failure but the resulting adverse selection is. (If you read my comment again you will see this is what I wrote.) In your second reply you write that the bad situation is " a government failure, not a market failure" because the government controls are not proper. You think this would not happen without government controls, only with bad controls?
Giskard
CC BY-SA 3.0
2016-07-07T01:04:02.813Z
There are various regulations that apply to rating agencies which in essence set standards for rating agencies with the assumption that something like "AAA" means the same no matter what company it comes from. Recently this has been explicitly legislated: https://newrepublic.com/article/119256/rating-agency-regulations-why-secs-new-rules-wont-fix-them . But perhaps saying that the government "sets the standard" is too strong a phrase.
B T
CC BY-SA 3.0
2016-07-07T01:07:15.203Z
@densesp Without government controls on what "AAA" means, people would be forced to assume that AAA from agency X means something different from AAA from agency Y. The assumption that two different companies have the same rating scale is the major problem causing rating inflation.
B T
CC BY-SA 3.0
2016-07-05T08:32:32.677Z
2016-07-05T08:32:32.677Z
B T
<p>There are only <a href="https://governology.substack.com/p/the-role-of-government-part-1" rel="nofollow noreferrer">3 fundamental types of market failure</a>:</p>
<ol>
<li>Externality</li>
<li>Anti-competitive markets</li>
<li>Sub-optimal initial allocation</li>
</ol>
<p>While information <em>can</em> be a positive externality, information about high value things like the skills of a potential employee are never an externality. There are two parties to a service transaction: the hired party and the hiring party. No 3rd party is affected, and therefore there is no externality involved. So by this logic, there is no economically justifiable role for government to play in certifying or licensing people's qualifications, tho it might well play a role in resolving disputes involving fraud if someone misrepresents their skills.</p>

CC BY-SA 4.0
2023-08-30T17:51:13.740Z
2023-08-30T17:51:13.740Z
B T
<p>The nature of information often makes it look like a public good. Is this the case for certification of peoples abilities? Is there a role the government could play in certifying people's abilities? Maybe do people thing that that's one of the roles that public universities play? <a href="http://www.econ.yale.edu/~dirkb/teach/pdf/spence/1973%20job%20market%20signalling.pdf" rel="nofollow">Spence</a> I guess is the typical reference that suggests that people go to school for certification/signaling of abilities rather than to acquire skills. Maybe that's a reason that there are many public universities?</p>

CC BY-SA 3.0
2016-05-20T17:17:50.010Z
"rather than teach anything useful" -- gesundheit (please avoid unnecessary normative judgments like this)
Kitsune Cavalry
CC BY-SA 3.0
2016-05-20T17:24:10.043Z
Ok, good, yes sorry.
Fix.B.
CC BY-SA 3.0
2016-05-21T11:58:06.700Z
@Fix.B. The word "public" appears only once in Spence's paper, on pg. 369. and it is followed by the word "information", not "university".
Giskard
CC BY-SA 3.0
2016-05-21T13:13:33.060Z
Yes, sorry, I did not communicate what I wanted. I meant that education, according to Spence, has a lot to do with signaling abilities. In that context, governments might have a role to play providing the infrastructure for people to do this signaling, and maybe that is a good reason to have many public universities.
Fix.B.
<labor-economics><public-economics><information><public-goods><education-economics>
Does the government have a role to play in certifying people's abilities for the labor market?
Fix.B.
# Does the government have a role to play in certifying people's abilities for the labor market?

(Asked by: username_0 on 2016-05-20)

The nature of information often makes it look like a public good. Is this the case for certification of peoples abilities? Is there a role the government could play in certifying people's abilities? Maybe do people thing that that's one of the roles that public universities play? [Spence](http://www.econ.yale.edu/~dirkb/teach/pdf/spence/1973%20job%20market%20signalling.pdf) I guess is the typical reference that suggests that people go to school for certification/signaling of abilities rather than to acquire skills. Maybe that's a reason that there are many public universities?

**Tags:** labor-economics, public-economics, information, public-goods, education-economics

> **Comments:**
> **username_1**: "rather than teach anything useful" -- gesundheit (please avoid unnecessary normative judgments like this)  
> **username_0**: Ok, good, yes sorry.  
> **username_2**: @Fix.B. The word "public" appears only once in Spence's paper, on pg. 369. and it is followed by the word "information", not "university".  
> **username_0**: Yes, sorry, I did not communicate what I wanted. I meant that education, according to Spence, has a lot to do with signaling abilities. In that context, governments might have a role to play providing the infrastructure for people to do this signaling, and maybe that is a good reason to have many public universities.  

---

## 2 answers

### Answer by username_3 on 2016-07-05. Score: 1

The appropriate role of government is to improve on free activity of the market by improving how the market works (ie fixing market failures). For skill certifications to be an appropriate role for government, such certification would have to be a public good, which would require that it creates a positive externality - a value given to someone that hasn't paid for it.

In the case of skill certification, there certainly is no positive externality. It's easy and in fact very often done in the free market. There are a myriad of certification programs, schools that give degrees, and tests you can take that provide some proof of skill. All of these things can be done with your usual buyer-seller relationship without any externalities happening. Therefore the government doesn't have a role to play there.

I wrote a whole article on the appropriate role of government, which might clarify things for you: <https://governology.wordpress.com/2016/07/05/the-role-of-government-part-1/>

> **Comments:**
> **username_2**: Clearly moral hazard exists in the case of most certification programs. If there are two programs handing out a similar certificate to people who successfully complete the program they have an incentive to lower the bar of acceptance. Word would spread and more people would choose the easier program. The solution could be separating the teaching entity from the examining entity. Government does have a role to play here by providing the examining entity. (The actual solution is usually certifying the entity to make sure there are standards.)  
> **username_2**: An example of moral hazard would be bond rating companies which were much criticised for their role in the 2008 financial crisis. As it is explained in the big short the rating agencies are payed for their services and companies wishing to certify their bonds with a high rating can choose freely. This can lead to a competition in overrating bonds, resulting in adverse selection.  
> **username_3**: @denesp "Word would spread and more people would choose the easier program." Word would also spread about that program lowering its bar. Certificates from that program would lower in value accordingly. Moral hazard isn't a market failure, despite that widespread myth.  
> **username_3**: The problem with bond rating companies is that the government is charged with regulating their ratings. While the government theoretically controls what "AAA" means, for example, if they give agents (bond rating companies) the ability to give out rating, then they have created an artificial situation where externalities can occur - the escalating overrating of bonds. This is a government failure, not a market failure and shows clearly why there is no role for the government to play here. If the rating scale were owned by a single company, that company would have an incentive to keep up quality  
> **username_2**: Moral hazard is indeed not market failure but the resulting adverse selection is. (If you read my comment again you will see this is what I wrote.) In your second reply you write that the bad situation is " a government failure, not a market failure" because the government controls are not proper. You think this would not happen without government controls, only with bad controls?  
> **username_3**: There are various regulations that apply to rating agencies which in essence set standards for rating agencies with the assumption that something like "AAA" means the same no matter what company it comes from. Recently this has been explicitly legislated: https://newrepublic.com/article/119256/rating-agency-regulations-why-secs-new-rules-wont-fix-them . But perhaps saying that the government "sets the standard" is too strong a phrase.  
> **username_3**: @densesp Without government controls on what "AAA" means, people would be forced to assume that AAA from agency X means something different from AAA from agency Y. The assumption that two different companies have the same rating scale is the major problem causing rating inflation.  

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### Answer by username_3 on 2023-08-30. Score: 0

There are only [3 fundamental types of market failure](https://governology.substack.com/p/the-role-of-government-part-1):

1. Externality
2. Anti-competitive markets
3. Sub-optimal initial allocation

While information *can* be a positive externality, information about high value things like the skills of a potential employee are never an externality. There are two parties to a service transaction: the hired party and the hiring party. No 3rd party is affected, and therefore there is no externality involved. So by this logic, there is no economically justifiable role for government to play in certifying or licensing people's qualifications, tho it might well play a role in resolving disputes involving fraud if someone misrepresents their skills.


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