Vertical and Horizontal Mismatch in the UK: Are Graduates' Skills a Good Fit for Their Jobs?

Understanding the skill mismatch among graduates, its causes and consequences is crucial for an economy as it reveals an inefficient allocation of resources that can lead to a decline in workers' wages and in a country's overall productivity performance. This study contributes to the skill mismatch debate by examining graduates' vertical and horizontal mismatch in the UK. Using the 2017 Annual Population Survey, we introduce a new, objective measure of horizontal mismatch (fit index) and account for skills beyond education. Performance of the fit index is compared with a standard measure of vertical mismatch, that typically refers to graduates employed in non-graduate jobs. We find that approximately 30% of graduates in the UK are employed in non-graduate jobs, while nearly 33% work in fields unrelated to their degree subject. Using information on the skill classification of occupations (SOC2010), we adjust these overall figures controlling for unobservable skills. This allows us to derive six skill groups, each capturing the distance between graduates' skills and those required on the job. At the top of skill distribution, we find graduates who are matched in terms of qualification and skills (44%), followed by those who are only horizontally mismatched, that is those who are employed in an occupation requiring a university degree but whose field of study does not match the requirements of the job (23%). At the bottom of the skill distribution, we find graduates who are overqualified on paper but whose skills are likely to be very close to those required on the job (16%). These graduates are particularly penalized in terms of wages. In fact, our estimates show that they earn approximately 40% less compared to those with a perfect job match. This wage penalty, on the other hand, is substantially lower for graduates who are only horizontally mismatched (approximately 2%). However, although for individuals a pure horizontal mismatch does not impose a strong downward pressure on wages, at the economy level it may reveal a misallocation of resources. Next to this misallocation, our results show that there is a considerable proportion of graduates who, despite investing in tertiary education, have not developed graduate-level skills. Among factors associated with the probability of a mismatch, we find that, next to the 'usual suspects' (quality of institution, degree classification, gender, age, marital status), being foreign born and graduating from a non-UK institution is strongly and negatively associated with the probability of finding a good job match. From a supply side perspective, foreign workers may have language barriers, lower reservation wages and poorer knowledge of the UK job market to allow them to secure a perfect job match. From the demand side, it is possible that employers in the UK do not have adequate knowledge of the education system in other countries. Further investigation of these issues is an important avenue for future research.