College Majors and Skill Mismatch in Labour

This paper studies the extent of skill mismatch across college major-occupation combinations. In the framework of this paper, skill mismatch is measured through individual wage losses in partial equilibrium and through output losses in general equilibrium. The model relies on the estimation of major-occupation returns based on the Roy model. Using Australian administrative tax panel data containing employment history and university degree information, we find sizeable wage losses, up to 28 percent, but smaller general equilibrium output losses, up to 10 percent – at the upper bound – from workers being allocated to occupations not well linked to their majors. Our results show that STEM, Commerce, and Social Science and Arts majors are the main drivers of aggregate mismatch, but a worker’s occupational mismatch declines over the life cycle, and, most importantly, in general equilibrium, disappears almost entirely by age 35.