All That Glitters Is Not Gold: The Impact of Certification Costs In Online Labor Markets

Abstract

Third-party skill certification is widely used to address the ubiquitous information asymmetry between workers and employers. When more workers attempt certification exams, the market should become more transparent, and the reduced information asymmetry should enable more transactions to occur. A natural way to encourage workers to take certification exams is to make the certification tests free. However, neither theoretical nor empirical studies have examined how the decision to offer free tests influences this emerging marketplace. This research fills this gap. First, we develop a stylized model to hypothesize the possible effects of zero-cost certification tests on the recruitment decisions of employers and their transaction amounts (i.e., contract prices) with workers at both job and platform levels. Second, we empirically test these hypotheses by exploiting a natural experiment that occurred when one of the largest online labor markets unexpectedly removed its certification test fees. Contrary to the platform's expectations, the offering of free certification tests reduced the signaling value of the certifications: Employers' preference for certified workers decreased (both in terms of hiring likelihood and price paid). More importantly, such preference change appeared economically justified, as workers certified under the new policy are less likely to deliver high-quality work. Furthermore, the fall in signaling value is particularly high for inexperienced workers who are still in the process of accruing reviews and are thus more dependent on certifications to secure work. The findings remained consistent over the longer term during our study period. Our results provide strong support for the study’s theoretical propositions and have important implications for platforms and practitioners in online labor markets.

Keywords: Certification Test Cost, Online Labor Market, Contract Rates and Price, Service Quality