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Wage Losses Due to Overqualification: The Role of Formal Degrees and Occupational Skills

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Abstract

Wage penalties in overqualified employment are well documented, but little is known regarding the underlying mechanisms. Drawing on new methods to measure the mismatch between jobs and qualifications, we test two explanations: formal overqualification and a mismatch of occupational skills, which have so far not been analysed. Using the National Educational Panel Study survey that is linked to German administrative data, we can objectively measure both types of mismatch. By using fixed-effects models, we confirm that overqualification is associated with a wage loss of approximately 5%, which indicates penalties when working at a lower requirement level. We find that some of this wage loss can be explained by a mismatch of skills between the current and training occupation. Further analyses show that mismatches of occupational skills explain the wage loss of formal overqualification for employees with vocational training. For academics, the two types of mismatch are unrelated. We conclude that, because of occupational boundaries and more specific occupational skills, vocationally trained people who are overqualified more often work in jobs with lower and different skill requirements. We emphasize that measuring both formal degrees and occupational skills and their mismatch allows for a deeper understanding of overqualification and wage-setting.

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Fig. 1

Source: Authors’ own graph, based on Reichelt and Vicari (2014)

Fig. 2

Source: Own computations based on the NEPS-ADIAB

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Notes

  1. For instance, an employee can be perfectly matched to his/her job regarding acquired and required formal qualification levels but has in fact fewer or different skills than the job requires.

  2. For further examinations of wage effects by different measures of overqualification, see Chevalier (2003), Chevalier and Lindley (2009) and Green and Zhu (2010).

  3. Alternative approaches to measure the skill distance or the “skill transferability” between a pair of occupations were introduced by Backes-Gellner and Geel (2011) and Gathmann and Schönberg (2010). In both approaches, survey respondents were asked about the match of their trained skills and skills required in their current job. The individual reports were aggregated to information on an occupational level. These approaches have two main drawbacks. First, respondents tend to “stick” with their trained occupation, which means that they report a high congruency between trained skills and currently examined tasks even after an occupational change (Behringer 2002). Second, the survey data are not representative of less common occupations, as there are only few or no individual observations to be aggregated at the occupational level.

  4. The author defines apparent overqualification as the case in which an individual is formally mismatched but satisfied with the match of his/her qualifications and work and genuine overqualification as the case in which an individual is formally mismatched and dissatisfied with the match between his/her qualifications and work (Chevalier 2003).

  5. As stated in the introduction, overqualification and skills mismatch are capturing two different types of mismatch. In the same manner, this is true for the measurement of the mismatch of occupational skills. An employee can be well matched regarding formal qualification levels but mismatched with regard to acquired and required occupation-specific skills.

  6. Wage setting depends not only on the qualification level but also on industrial sectors or unionization of an occupation or demand-side factors. For example, some unskilled assembly-line workers in the automobile industry earn far more than hairdressers (who receive vocational training) on average. This could be motivation for switching occupations and voluntarily working overqualified positions.

  7. The first wave, which includes the survey period from 2009 to 2010, is linked to the administrative dataset.

  8. Vocational training in Germany involves a 3–3.5 years’ apprenticeship program that usually starts after 9 years of schooling. It can also start after graduation from high school, which is after 13 years of schooling. In a few cases, there are also 2-year programs.

  9. After implementation of the bachelor’s and master’s system in Germany (Bologna Process), the usual graduation time shifted to 3 years for completing bachelor’s studies and an additional 2 years for completing master’s studies. Before the reform, usual diploma or magister studies took 4–5 years until graduation. Only high school graduates, after 13 years of schooling, are eligible to attend university.

  10. For detailed discussions on the advantages and disadvantages of several measurements of overqualification, see Büchel (2001), Hartog (2000), Leuven and Oosterbeek (2011) and Verhaest and Omey (2010).

  11. See the Robustness checks section for the results of other kinds of operationalisations.

  12. For more information, please visit the BERUFENET homepage: http://berufenet.arbeitsagentur.de.

  13. There are between 2 and 20 core requirements or 7.4 core requirements on average (Dengler et al. 2016) that describe each occupation. However, there is no evidence of a systematic difference in the description among different occupation types, such as occupations in the producing industry compared with occupations in the service sector.

  14. Information on the current occupation and training occupation is reported by respondents in clear text fields. Later, it is coded by specially trained coders in a double coding process to increase the reliability of the codes. Information on the educational level and training is obtained via multiple-choice questions and is revised in a later module of the questionnaire to increase reliability.

  15. Measured as occupational groups (a 3-digit code) of the German Classification of Occupations 2010 (KldB 2010).

  16. All results are available upon request.

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Acknowledgements

The authors would like to thank Silke Anger, Britta Matthes, Joe King, Martin Abraham, Monika Jungbauer-Gans, the participants of the AG Qualität der Beschäftigung, IAB Nuremberg, the editor, and three anonymous reviewers for valuable comments and help. This research did not receive any specific grants from funding agencies in the public, commercial, or not-for-profit sectors. This paper uses data from the National Educational Panel Study (NEPS): Starting Cohort 6—Adults, doi:10.5157/NEPS:SC6:3.0.1. From 2008 to 2013, NEPS data were collected as part of the Framework Programme for the Promotion of Empirical Educational Research funded by the German Federal Ministry of Education and Research (BMBF). As of 2014, the NEPS survey is carried out by the Leibniz Institute for Educational Trajectories (LIfBi) at the University of Bamberg in cooperation with a nationwide network.

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Authors and Affiliations

  1. German Centre for Higher Education Research and Science Studies (DZHW), Otto-Schill Strasse 1, 04109, Leipzig, Germany

    Nancy Kracke

  2. New York University Abu Dhabi (NYUAD), Division of Social Science, Abu Dhabi, United Arab Emirates

    Malte Reichelt

  3. Institute for Employment Research (IAB), Regensburger Strasse 100, 90478 Nuremberg, Germany

    Malte Reichelt & Basha Vicari

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  1. Nancy Kracke
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  2. Malte Reichelt
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Correspondence to Malte Reichelt.

Appendix

Appendix

See Table 6.

Table 6 Effects on the log individual deflated net daily wage (full model).
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Kracke, N., Reichelt, M. & Vicari, B. Wage Losses Due to Overqualification: The Role of Formal Degrees and Occupational Skills. Soc Indic Res 139, 1085–1108 (2018). https://doi.org/10.1007/s11205-017-1744-8

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