The number of college graduates have increased overtime, with an estimated 30% of adults holding degrees by the close of the year 2010 in the United States. It is estimated that upwards of 50% workers have level of education that do not match their respective levels of education, with the majority of these employees having relatively more education than is required. Overeducation results in considerable wage costs by individuals, coupled with productivity losses to the economy. These costs have increase in part due to the faster rise in higher education participation, which has not been matched, by corresponding increases in the number of suitable employment opportunities for graduates. Perhaps even most importantly according to Leuven & Oosterbeek (2011, p. 7), overeducation “More importantly, the returns to surplus and deficit schooling are very low in absolute value and represent only around 45% of the returns to required schooling.” As student loan levels rise ($845 billion by the close of June 2011), the cost of under-utilization of expensive skills, it is clear that the labour market has failed to signal, or learning institutions(individual workers) have failed to recognize the signals. Consequently, there an increasing gap.
According to Rubb (2003) offered evidence drawn from the Current Population Survey, which indicated that overeducation in the United States had shown a measure of persistence. It estimated that about 30% of overeducated workers in a given year switched to jobs that matched their level of qualification in the subsequent years. On the other hand, duration dependence and dynamic selection effects point to the fact the probability of the transition to jobs that match qualifications falls with time, in part because of the increasing number of graduates on the market. Among the individuals that were just-educated during year t, about 3% gain even more skills by the end of year t+1. In all demographic groups and under all economic conditions, less than 5% of workers that are just educated became overeducated. The finding that overeducation was likely to persist into the long term is not not only significant but has been proven by subsequent studies. Rubb (2003) provided an important insight into the incidence and probability of the phenomenon to persist into the future. It also points to the possibility that the graduate glut has heightened competition in labour market due to high supply of graduates, the situation has only served to drive graduates to find more skills. This is why incidence of overeducation changes over a worker’s career and wages equally differ across the perfectly matched, overeducated and the undereducated workers.
Clark, Joubert, & Maurel (2014) established that between 18% and 25% of the workers surveyed were overeducated, to the extent that the overeducated attracted a markedly lower salary compared to workers that held jobs that matched their respective jobs. Further, about 40% of graduates were overeducated for the jobs that they held (they worked in jobs that required 12 years of education), which points to the possibility that overeducation represents a sizeable portion of wage dispersion among those individuals. Clark, Joubert, & Maurel (2014) found that the overeducation was relatively absent at the highest schooling level because of the relatively small number of jobs that required such education. It also tried to determine the probabilities of being unemployed, overeducated, uneducated and perfectly matched. The results showed that overeducation proved persistent, with upwards of 65.9% of workers remaining overeducated after a year, which is relatively higher than the expected probability of being overeducated during a certain year (46.3%).
Comparatively, unemployed workers were up to 49% more likely to remain unemployed, effectively showing a transition probability that is similar to the transition from overeducation to perfectly matched.Further, the results point to the possibility that ethnicity, gender and other demographic characteristics also plays a role in the incidence of overeducation. Female workers have between 5% to 13% probability of being overeducated compared to male workers and at 14 schooling years, Hispanic and Black were both more likely to be overeducated (12% and 16% respectively) compared to the mainstream white workers. The differentials along ethnic lines mirror the results by Vedder, Denhart, & Robe (2013), which found differentials along the specific majors annd colleges attended by the graduates.
The economic costs of education acquisition and the opportunity cost due to the under-utilization of the skills gained is considerable. According to Belfield, Levin, & Rosen (2012), there are as many as 6.7 million youths aged between 16 and 24 that are out of school and chronically without employment. The study established that the opportunity youth tend to work sporadically at poor-paying jobs, earning $4,100 (inclusive of $750 in taxes). In contrast, the peers to these youth earn in excess of $13,900 (inclusive of $2,430 in taxes) annually. The young people are also most likely to be without insurance. On the other hand, Aberg (2003) argues that underemployment of skills has associated losses in productivity as the less than optimal utilization of skills causes a less than Pareto efficient allocation of resources. In addition, the persistence of overeducation over the long run as established studies such as Rubb (2003) and Clark, Joubert, & Maurel (2014) results in a wage penalty over the lifetime of individual workers as well as their lifetime wealth. Overeducation may also pull down the individuals’ social class, since their occupations may not adequately match their skills, which is why they are forced into a lower economic class than they deserve.
According to Vedder, Denhart, & Robe (2013), the rising number of graduates has forced them into relatively low-skilled jobs, which have historically been occupied by lesser qualified workers. Upwards of 48% of workers in the United States that are college graduates in jobs that the Bureau of Labour Statistics believes requires less than four years if college education. An additional 11% of employed college graduates are in jobs that require more than a high school diploma, but less than a university degree, while in excess of 37% are in occupations that require less than high school qualification. The proportion of overeducated workers are are overeducated for their occupations has also grown substantially since the 1970s. It is estimated that fewer than 1% of taxi drivers and 2% of firefighters were college graduates in 1970, but by upwards of 15% of graduates are presently taxi drivers and/or firefighters. In addition, comparisons of average high school and college earnings are highly misleading as a pointer to vocational success, not least because the high number of college graduates has had the effect of lowering the overall graduate earnings. There are also adverse implications on graduates depending on their majors and colleges. Flagship state universities have higher likelihoods of doing better relative to those that attend non-selective colleges, in the same way that majors like Engineering and Economics pay better than social science majors.
On the part of employers, the graduates glut and reduced wages due to oversupply of labour results in relatively lower wage costs. The wage penalties incurred by overeducated employers either accrue to employers are deadweight losses to the economy. Oversupply of graduates tilts the scale in favour of employers, who have greater bargaining power relative to the workers. Workers that have experienced overeducated employment also suffer wage penalties of between 2.6% and 4.2%. This wage penalty persists for up to four years. There is a heightened likelihood for the unemployment to gain more skills than is necessary for the jobs that they look for and finally get employed in. In common with Rubb (2003), Clark, Joubert, & Maurel (2014) established that every additional year of schooling increases wages by about 9.6%, but every additional year of overeducation led to a 50% reduction in the return. However, the lower returns for highly skilled employees may have implications on the employee motivation and job satisfaction, which not only contributes to reduced productivity, but also adds to the increased deadweight losses.
Overeducation costs the workers and the government money, which is however not accounted for in the returns. Much of the expenditure is perhaps best exemplified by the mounting student loan burden in the United States, which is estimated to have reached more than $1 trillion. According to Greenstone & Looney (2013), there was a marked increase in the volume as well as frequency with which student loans have risen. Student loans expanded by more than 77% between 2002 and 2012, with an average loan debt per student rising by as much as 60%, to reach more than $5,500. The labour market conditions are a major contributor to the difficulty of the loans repaying. The scarcity of jobs, and the scarcity of suitable jobs for the level of qualifications has a negative effect on income and wealth, which in turn affect the loans’ ability to pay.
Further, the growth of private higher education providers resulted in the inflation of fees, which in turn contributed to the student loans burden. While the cost of attending college have increased overtime, the rate of returns for the same skills has reduced overtime. Actually, student enrolment in the United States expanded by 27% between 2002 and 2011. In addition, the high number of private colleges has also contributed to the distortion of the labour market’s signalling mechanisms, which has in turn resulted in more and more students enrolling even when there is an oversupply of people with the skills that they are looking to gain.
It clear that the mismatch of skills has considerable efficiency implications on the labour market as well as in the allocation of public, educational and personal resources. Overeducated workers are likely to be employed in jobs that require lower skills than they have gained (Cattani, Guidetti, & Pedrini, 2014; Aberg, 2003). The growing role of private education providers has also contributed to the failure of the labour market to signal the educational sector, resulting in increased enrolments even when the labour market’s ability to absorb the high number of graduates has reduced overtime. The excess costs are evidenced both in reduced productivity as well as the rising student loan burden in the country. The efficiency costs to society stem from the fact that more resources are unecessarily invested in the acquisition of more skills than are needed with the current level of production and technology. These resources could have been employed more productively in other sectors of the e conomy. Similarly, the underutilization of the resources additionally acquired skills amounts to a wastage of resources by the society, which also has efficiency implications.
Aberg, R. (2003). Unemployment Persistency, Over-education and the Employment Chances of the Less. European Sociological Review 19(2), 199-216.
Belfield, C. R., Levin, H., & Rosen, R. (2012). The Economic Value of Opportunity Youth. Washington, DC: Corporation for National and Community Service and the White House Council for Community Solutions.
Cattani, L., Guidetti, G., & Pedrini, G. (2014). Assessing the Incidence and Wage Effects of Overeducation Among Italian Graduates Using a New Measure for Educational Requirements. Quaderni - Working Paper DSE N° 939.
Clark, B., Joubert, C., & Maurel, A. (2014). The career prospects of overeducated Americans. Duke University, Retrieved from https://ipl.econ.duke.edu/seminars/system/files/seminars/452.pdf.
Green, F., & Henseke, G. (2014). The Changing Graduate Labour Market: Analysis Using a New Indicatorof Graduate Jobs. New York: Centre for Learning and Life Chances in Knowledge Economies and Societies.
Greenstone, M., & Looney, A. (2013, July 5). Rising Student Debt Burdens: Factors Behind the Phenomenon. Retrieved Nov 2, 2014, from Brookings Institute: http://www.brookings.edu/blogs/jobs/posts/2013/07/05-student-loans-debt-burdens-jobs-greenstone-looney
Leuven, E., & Oosterbeek, H. (2011). Overeducation and Mismatch in the Labor Market. IZA Discussion Paper No. 5523, 1-26.
Rubb, S. (2003). Overeducation: a short or long run phenomenon for individuals? Economics of Education Review 22(4), 389–394.
Vedder, R., Denhart, C., & Robe, J. (2013). Why Are Recent College Graduates Underemployed? Washington, DC: Center for College Affordability and Productivity.