Skill (mis)matches and over-education of younger workers

Younger workers, particularly those entering the workforce at ages 25–34 years, are more educated than ever before. The potential for these workers to be over-educated in their jobs might therefore be high. But does it follow that they are mismatched to the skill requirements of their jobs?

This study examines the link between over-education and skill mismatches for Australian workers aged 25–34 and 35–44 years of age, based on an analysis of data from the 1996 Survey of Aspects of Literacy and the 2006 Adult Literacy and Life Skills Survey. In addition, the wage returns from over-education and over-skilling are investigated.

This research provides an interesting comparison with work done by Mavromaras, McGuinness and King (http://www.ncver.edu.au/publications/2231.html), which also looked at job mismatch in workers, using data from the Household Income and Labour Dynamics in Australia (HILDA) survey.

Key messages

• This research confirms that there are substantial differences between the two concepts of over-education and over-skilling. Most over-skilled workers have low levels of education and require fewer skills at work than they actually have. The majority of under-skilled workers hold a university degree, suggesting that many highly educated workers find themselves in challenging jobs.
• However, over-education is associated with skills' under-utilisation.
• The effects of over-education on wages differ substantially across education levels, with the penalty from over-education less severe for highly educated workers than for workers with lower educational attainment.
• Ryan and Sinning find that it is the level of education more than the skill level of workers that determines their remuneration, with over-skilling having no additional effect on wages beyond that accounted for by over-education.

The cost of younger workers with vocational education and training (VET) qualifications being over-educated and in low-skill jobs is of concern. That this effect is also observed in slightly older workers suggests that some VET graduates find themselves entrenched in low-level jobs.

Tom Karmel
Managing Director, NCVER

The literature on over-education and under-education is based on the idea that each occupation has a reference level of education required for adequate job performance. Workers are termed 'overeducated' if the educational 'requirements' of their jobs are less than their own educational attainment. From an econometric point of view, over-education can be considered as a waste of the private and social resources devoted to education, at least that part that is in excess of requirements.

In this study, we analyse the extent of over-education in the Australian labour market among workers aged 25 to 44 years of age. Our measure of over-education is based on an assessment by the Australian Bureau of Statistics (ABS) of the level of education typically required for the satisfactory conduct of the tasks involved in different occupations. Those with more education than is a typical measure are treated as over-educated. From a theoretical perspective, we expect that he effects of over-education are particularly strong among younger workers aged 25 to 34 years, who enter the labour market after receiving a relatively high level of education. By comparing this group of workers with older workers aged 35 to 44 years, we may draw inferences about the relevance of over-education for older (typically more experienced) workers.

Our purpose, however, is to go beyond an analysis only of over-education. We also want to examine the link between over-education and skill mismatches in the Australian labour market. Specifically, we use information on a set of narrow, but important, individual literacy and numeracy skills and the extent to which individuals report that they undertake tasks requiring those skills in their jobs to generate a measure of 'relative skill use'. The measure reflects the skill requirements of workers' jobs relative to the skills that individual workers possess. This measure allows us to distinguish between 'over-skilled' workers (those with high levels of skills who report rarely undertaking tasks involving such skills) and 'under-skilled' workers (those with low levels of skills who report frequently undertaking tasks involving skills they do not seem to have). In our empirical analysis, we analyse separate measures of over-education and of 'over-skilling'. Such a distinction is relevant because highly educated (including over-educated) workers are not necessarily those who are over-skilled. In fact, it seems likely that highly educated workers have jobs that require more skills than they actually have, while less-educated (including under-educated) workers have jobs that require fewer skills than they actually have.

Our empirical analysis consists of two broad parts. The first is a descriptive analysis of the extent of over- and under-skilling in the workforce population and the characteristics of such workers (including their age, gender, education and occupation). We also examine changes in skills and skill requirements over time and the relationship between over-education and over-skilling. The first part of the study also involves regression analysis, which allows us to investigate the factors that are associated with skill mismatches. Following the economic literature on over-education, the second part of the analysis examines the relationship between over-skilling and over-education and wages, in which we pay particular attention to the returns from over-education.

Our interest lies in addressing the following questions:

• Are over-educated workers necessarily over-skilled and under-educated workers under-skilled?
• Are skill mismatches the result of over-education or under-education?
• What factors are responsible for the misallocation of individual skills and job requirements?
• Are the returns from over- or under-education attributable to individual skills or skill
  requirements at work?
• Are the returns from over-education different across age groups and do they change over time?

Our analysis is based on data from the 1996 Survey of Aspects of Literacy (SAL) and the 2006 Adult Literacy and Life Skills (ALLS) Survey. These surveys include information about the skills required in the workers' jobs and separate estimates of the skills that workers actually possess in different occupations and industries and allow an investigation of changes in these phenomena over time. Our empirical analysis concentrates on workers in younger age groups (25–34 years) but also includes comparisons with older workers (35–44 years). Changes in skill (mis-)matches are assessed by comparing workers aged 25–34 years observed in 1996 with workers aged 25–34 years in 2006. The results derived from this analysis permit inferences about the extent of any over-education among younger age cohorts and whether it has changed.

The major findings and their implications are highlighted in the points below:

Skill (mis-)matches and over-education:

• Substantial differences may be observed between the two concepts of over- or under-education and over- or under-skilling:
  • Most over-skilled workers have low levels of education and require fewer skills at work than they actually have because they work in low-skilled jobs.
  • The majority of under-skilled workers hold a university degree, suggesting that many highly educated workers have jobs that require more skills than they actually seem to possess.
  • By construction, over-educated workers have at least a post-school qualification and most of them hold a university degree, while most of the under-educated workers tend to be those without high-level post-school qualifications.
• Full-time employed workers tend to be in jobs with significantly higher skill requirements than part-time employed workers with the same skill level. Employer size is also a strong predictor of higher relative skill requirements at work.
• There are no gender differences in relative skill requirements (that is, skill requirements relative to skills) after controlling for other relevant factors.
• Education is positively associated with relative skill requirements at work.
• Under-educated workers use their relative skills more often than over-educated workers, so
  over-education does contribute to skill mismatches.

Returns from over-education and under-education:

• Both under-educated and under-skilled workers have, on average, higher wages than overeducated and over-skilled workers.
• In line with existing studies, a penalty from over-education is observed after controlling for the actual level of education. (The wage penalty results from the fact that over-educated workers would have been able to earn higher wages in jobs that require their level of education.)
• This penalty varies substantially by highest educational level and is more substantial for those with vocational qualifications than those with university degrees.
• After controlling for over-education, over-skilling has no additional effect on wages, indicating that the (observed) level of education rather than the (unobserved) skill level determines the remuneration of workers.
• When comparing different age cohorts, workers of the age cohort 35–44 years are affected by over-education in the same way as workers aged 25–34 years.