Belgium & Overeducation Risk: Job Market Friction vs Education Overinvestment
A GLO discussion paper (Returns to Education and Overeducation Risk: A Dynamic Model by Lorenzo Navarini and Dieter Verhaest) gives new insights into how overeducation affects wage returns to higher education. It challenges long-held assumptions about overinvestment in college degrees and gives us a more nuanced understanding of educational outcomes.
The big picture: Using rich Belgian data and a novel dynamic model, the researchers uncover complex relationships between educational attainment, overeducation, and wages that paint a more optimistic picture of higher education returns than previously thought.
Key findings:
Overeducation causes persistent wage penalties:
Wage penalties represent reduced earnings for overeducated workers compared to adequately matched peers with the same education level.
3-4% for upper secondary and bachelor's degrees at age 23, but the penalty for bachelor's degrees tends to fade by age 29
Increases to 8.7% for master's degrees by age 29
Suggests scarring effects of initial overeducation for some graduates
These penalties don't necessarily translate to lower overall returns:
Bachelor's degrees reduce overeducation risk by ten percentage points compared to upper secondary degrees.
Master's degrees still provide substantial unconditional returns (10.6% at age 29) despite increased overeducation risk.
Upper secondary degrees show limited returns, partly due to increased overeducation risk (30 percentage point increase)
Effects align with job polarization trends:
Obtaining a bachelor's degree (strangely) appears to be an effective strategy to avoid overeducation.
Challenges the notion that overeducation is primarily a problem among higher education graduates
Overeducation contributes to heterogeneity in realized (ex-post) returns:
It was especially pronounced for master's degrees.
The culprit is most likely job market friction.
Some graduates experience negative realized returns despite positive expected returns.
Substantial heterogeneity in both expected and realized returns to education:
Differences in overeducation probabilities reflect differences in expected returns.
Overeducation risk doesn't seem to reinforce this heterogeneity further.
Methodology:
Developed a novel decomposition framework to assess overeducation's impact on wage returns more comprehensively
Used a dynamic model of joint educational choices and labor market outcomes
Estimated based on detailed longitudinal data about young people's careers in Belgium (SONAR data)
Accounted for selection bias and unobserved heterogeneity using a finite mixture distribution
Utilized counterfactual simulation strategies to estimate treatment effects
Between the lines:
This study challenges conventional wisdom about overeducation and educational policy. Rather than indicating inefficient educational policies, the findings suggest overeducation is more likely a result of labor market frictions.
Consequently, reducing investments in higher education may not be the answer to solving overeducation among young workers. In fact, the results indicate that widening access to bachelor's degree programs could be beneficial. Job hunting challenges and inefficiencies in the job market are the primary culprits behind overeducation, not an overinvestment in education.
The research reconfirmed that higher education is boosting productivity, but the job market's inefficiencies create painful uncertainty for graduates despite, well, being more productive. Maybe we shouldn't focus on curtailing educational opportunities, but improving job matching and HR practices.
Additional Context:
The Belgian labor market is relatively rigid, which may affect the strength of overeducation penalties.
Data covers individuals entering the labor market between 1994 and 2003, a period of documented job polarization.
Belgium combines high public subsidization and low tuition fees with compulsory schooling until the age of 18
The bottom line: While overeducation can create wage penalties, obtaining a college degree is often an effective strategy to improve job prospects and earnings potential.