Over (under) education and wages: another look on the return to education

ABSTRACT

Much research has been made in recent years on the effect of over and under education on earnings. In this paper, I examine the validity of the assumption that the return to over (under) education is independent of the level of education. I use data from the PIAAC survey to estimate the return to education. The findings show that while this assumption might be valid for the return to under-education, it seems to be wrong for estimating the return to over-education. I offer an alternative model where the return to over-education or under-education is not linear and depends on the level of education.

KEYWORDS:

• Over-education
• wage penalty
• ORU model
• return to education

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. The ILO experts used the International Standard Classification of Education and the International Standard Classification of Occupations to determine the required level of education of workers in each occupation and compared it to their actual level of education.

2. The results in the literature on the connection between the expansion of higher education systems and over-education are ambiguous (See for example Chevalier and Lindley (2009), Allen and Belfi (2020) and Kucel (2011) literature survey on one hand and Delaney, J. McGuinness, S. Pouliakas, K. and Redmond, P. (2020) on the other hand).

3. See Leuven and Oosterbeek (2011) survey about the ORU model.

4. 4. The second hypothesis omits the post-secondary not tertiary educated workers. The reason for doing almost the same test twice is the admission process of universities and colleges. In countries where the higher education system is subsidised, policymakers are interested in the return to a year of tertiary education.

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Yaakov Gilboa

Yaakov Gilboa is a former senior lecturer of economics at Sapir Academic College and one of the founding members of the department of Applied Economics and Management in the college. His main areas of research are Labor Economics and Economics of Education.