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

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.