Overeducated in the EU – Taking time to ensure that the job matches your skill set has a big pay‐off

Studies of skill mismatch tend to focus on one of two central measures (a) overskilling which describes the phenomena whereby workers are unable to use a range of their skills and abilities in their current job and (b) overeducation, which describes the phenomena whereby workers have acquired a level of schooling in excess of what is required to either get or do a job. The literature to date suggests that there is a less than perfect correlation between overeducation and overskilling and that both phenomena tend to have quite distinct implications for workers. Overeducation tends to be associated with a large penalty on pay but a lower impact on job satisfaction, whereas overskilling tends to affect pay less but is associated with much lower levels of job satisfaction. In this study we are interested in decomposing the impacts of qualification mismatch on worker pay and, consequently, our focus is exclusively on overeducation which has consistently been associated with a substantial pay penalty.

Figure 1 shows that, on average, overeducation in the EU is more prevalent among younger‐ aged employees, females and individuals who were outside of the labour market (unemployed or inactive) prior to accepting their current employment. It is also higher among tertiary education graduates, particularly those from certain fields of study, such as humanities, languages and arts and other social sciences. Rates of overeducation are also significantly different depending on the characteristics of jobs. In particular, they are higher for individuals employed in smaller‐sized firms and in less skill‐intensive occupations (e.g. elementary jobs, service and market sales workers) and for those in non‐standard contract jobs (part time, informal, temporary agency contracts).

Results confirm that while individual and job characteristics are important in explaining the overeducation pay penalty of graduates, the job selection process and, in particular, taking time to ensure that the job matches your skill set, has a big pay‐off. The reduction of information asymmetries among graduates with regards to available job opportunities therefore appears to be a key policy response to overcoming the problem of graduate overeducation. From a theoretical perspective, graduate overeducation appears consistent with aspects of human capital theory, assignment theory and the signalling model, so important lessons can be learnt from each perspective in terms of reducing the incidence of overeducation. The finding that overeducation is consistent with a signalling problem is more novel. From a policy perspective the signalling result highlights the importance of effective guidance and counselling, provision of incentives for job mobility and perhaps of prolonged job search to facilitate the better matching of the skills of tertiary graduates with their jobs.

Among medium‐educated workers, ignoring country level fixed effects, the largest explained effects relate to job characteristics, such as the fact that the overeducated are more likely to be in temporary contracts and are located in smaller firms and in jobs without promotion prospects. Differences in job skill requirements are also an important factor, with overeducated workers being paid less as they tend to be in jobs that only require a basic level of skills. Raising job quality, or increasing job flexibility, would therefore appear to constitute a more effective policy response for mitigating overeducation experienced by individuals with a medium‐level education. As overeducation among the medium educated appears to be related to job‐specific productivity ceilings which limit wage growth, the observed outcomes appear more consistent with both the job competition and assignment interpretations of the labour market.

It is likely that the relative contribution of the various theoretical frameworks and, therefore, the most appropriate recommendations with respect to policy change will vary across countries and more research is needed in this respect. A crucial aspect of the existing results highlight the fact that overeducation among medium skilled workers is less common within lower wage economies, suggesting that structural factors are a key determinant of mismatch. The results suggest that the relative demand for intermediate labour declines as economies grow, perhaps due to the impact of skill biased technological change, resulting in higher rates of overeducation among medium skilled workers who are potentially being “bumped down” into lower quality jobs.

Finally, it is important to note that despite the use of a highly detailed data set, the majority of the overeducation pay penalty could not be explained in terms of endowment effects. More research is certainly required if we are to fully understand both the determinants and consequences of overeducation in the labour market.

Chosen excerpts by Job Market Monitor. Read the whole story at IZA Deconstructing Theories of Overeducation in Europe: A Wage Decomposition Approach