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No. 700: The Effect of Educational Mismatch on Wages Using European Panel Data

Iñaki Iriondo , Complutense University of Madrid and Queen Mary, U
Teodosio Pérez-Amaral , Complutense University of Madrid

January 1, 2013

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Abstract

This paper analyzes the effect of educational mismatch on wages, using a rich panel dataset of workers in the major euro area countries from 2006 to 2009, drawn from the European Union Statistics on Income and Living Conditions (Eurostat). We use a consistent estimator to address the two econometric problems faced by the empirical literature: the omitted variable bias and measurement error. In principle, our fixed effect estimates confirm that overeducated workers suffer a wage penalty of similar magnitude to the return on each year of schooling attained. Interestingly, when we split the sample by age, we find that the wages of people aged under 35 basically depend on the level of education attained, while those of workers aged over 35 depend on job educational requirements. These results are interpreted taking into account the impact of the depreciation of skills on human capital. The main policy implication of the paper is that overeducation constitutes a waste of resources. Therefore public authorities should seek to reduce the negative impact of overeducation on the labor market.

J.E.L classification codes: I21, J24, J31

Keywords:Overeducation, Educational mismatch, Wages, Ability bias, Measurement error, Panel data

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