The Persistence of Overskilling and Its Effects on Wages. Research Report

Overskilling is the phenomenon whereby a worker's skills are underutilised in his or her job. Overskilled workers are employed, but they are underutilised and mismatched, in that their skills and abilities are not a good match with the requirements of the job. Overskilling can lead to decreased wages and job satisfaction, which suggests that the investment in skills for that individual has been somewhat wasted. Overskilling mismatch has been shown to be persistent; that is, present overskilling mismatch increases the probability of future overskilling mismatch. However, the previous research showing this extends back only one year. This report examines the persistence of mismatch over a longer (up to three years) time period and its effect on wages. An obvious explanation for the persistence of overskilling is that it reflects personal unobserved characteristics (such as the person having an inflated view of their own skills). This paper exploits longitudinal data to show that persistence is more than this, with the probability of being overskilled increasing if the individual has been overskilled in the previous period, after allowing for unobserved characteristics. Key findings include: (1) Overskilling is persistent: overskilling mismatch is common among those who have been overskilled in the past. Persistence varies by educational level, with its being lowest among university graduates and highest among VET diploma graduates and those who did not finish high school; and (2) The wages of university graduates are reduced by past overskilling, more so than for any other education level. A possible reason for the second finding is that graduates tend to be in better-paid jobs and therefore there is more at stake for them. This observation is supported by the results of quantile regressions, which differentiate the impact of overskilling by whether an individual is at the top or the bottom of the earnings distribution. With the exception of certificate III and IV graduates, workers who are better paid among their peers are more likely to suffer higher wage penalties from being overskilled. Appended are: (1) Definition of variables; and (2) Estimation of individuals' probability of being overskilled in their current job and the effect of state dependence. (Contains 15 tables, 6 figures, 1 box and 10 footnotes.)