Academic Literature

Overeducation – The problem relates to the supply of educated labour exceeding demand coupled with an inflexible labour market

Overeducation describes the extent to which an individual possesses a level of education in excess of that which is required for their particular job.

Overeducation is potentially costly to the economy, the firm and the individual. At a macroeconomic level, national welfare is potentially lower than would be the case if the skills of all overeducated workers were fully utilized within the economy; in addition, it may be that tax revenues are also being wasted on equipping individuals with non-productive education. At a firm level, there is some evidence to suggest that overeducation is associated with lower productivity.

As individuals, overeducated workers, by virtue of the fact that a proportion of their educational investment is unproductive, are likely to earn a lower return on their investment relative to similarly educated individuals whose jobs match their education. Overeducated workers may also incur non-transitory costs associated with lower levels of job satisfaction.

It is also possible that previously well-matched workers in the economy will be ‘bumped down’ in the labour market and, perhaps out of it entirely, as over- educated workers move into lower level occupations thus raising the mean educa- tional level within these occupations rendering some previously adequately educated individuals undereducated.

However, not all economists believe that overeducation is either permanent in nature or associated with high costs.

The Incidence of Overeducation

The various incidence estimates from the raft of overeducation studies are summarized in Table 2. In total, 33 studies generated 62 estimates with the number of subjective and objective estimates relatively evenly split at 34 and 28 respectively.

Objective-based approaches were found to generate lower estimates with the mean objective-based incidence standing at 22%, some 7% points below the comparable subjective figure.

In order to determine whether the overeducation phenomenon may be becoming more important over time, Figure 2 plots subjective estimates against the year in which the relevant data were collected. There are no indications that the incidence of overeducation has been rising over time; in fact, fitting a linear time trend to the observations is suggestive of a slight decrease. Nevertheless, given the proble- matic nature of the data, it would be foolish to attach too heavy a weight to the very slight negative slope of the best fit line.

Summary and Conclusions

On balance, the evidence from existing overeducation studies tends to support an Assignment interpretation of the labour market implying that both individual and job characteristics are important for determining wage rates in the economy. The arguments put forward by researchers who maintain that the apparent wage effects of overeducation arise largely from flaws in the empirical framework are at the very least debateable. Therefore, on the basis of the evidence, there is scope to conclude that the impacts of overeducation are likely to be non-trivial and that the phenomenon may potentially be costly to both individuals and firms and the economy more generally.

The study therefore raises a number of important issues for policy. The wisdom of the current government policy in pursuing a 50% higher education participation target must surely be highly questionable. In a very recent study, Walker and Zhu (2005), using a very rough measure of graduate overeducation, indicated that, post-expansion, the incidence of overeducation in the UK has risen for both male and female graduates across almost all subject groups; however, the rate of growth seemed particularly rapid for graduates in the Arts and Humanities. The obvious implication, therefore, is that should higher education participation continue to expand in line with current government targets then rates of over- education will inevitably rise incurring further costs on individuals, firms and the economy. It is also clear from the literature that, particularly at the graduate level, the incidence of overeducation is non-random with respect to subject studied as graduates from backgrounds such as Arts, Humanities and some Social Sciences are much more likely to end up overeducated. This raises the question with respect to the extent to which government should seek to re-orientate the educational system away from the Arts and Humanities towards more vocationally orientated subjects with higher levels of job relevant skills. Nevertheless, it is likely that such a strategy, whilst providing some benefits, is unlikely to provide a solution to overeducation, as the evidence suggests that the problem effectively relates to the supply of educated labour exceeding demand coupled with an inflexible labour market, whereby employers are either unable or unwilling to alter their production processes to fully utilize the skills of their overeducated workers.

Chosen excerpts by Job Market Monitor. Read the whole story at  Overeducation in the labour market

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