The Effect of Vertical Educational Mismatch on Wages: Evidence from Indonesia's Waged Sector

Dani Rahman Hakim; Iin Rosini

Authors

Dani Rahman Hakim Faculty of Economics and Business, Universitas Pamulang, Indonesia https://orcid.org/0000-0001-5385-493X
Iin Rosini Faculty of Economics and Business, Universitas Pamulang, Indonesia

Keywords:

Educational Mismatch, Overeducation, Undereducation, Wages

Abstract

This study is the first to analyse the determinants and wage impacts of vertical educational mismatches in the wage sector in Indonesia. This study is also the first to examine the wage effect of vertical educational mismatch based on the fields of study, gender, and spatial conditions of the worker cohorts. Using the 2022 national labour force survey datasets, we calculate overeducation and undereducation using the job analysis approach. We found that almost half of the Indonesian workforce held jobs that did not correspond to their level of education. The determinants of vertical educational mismatch are identified based on individual, educational, and fields of study, job and employer, and spatial characteristics. Using the ORU[i] and VV[ii] models, we found that the wage effect of vertical educational mismatch relied on gender, fields of study, and spatial conditions. In general, both overeducated and undereducated workers earn a wage premium. Overeducated workers in urban areas get higher returns than those in rural areas. However, if estimated based on the field of study cohort, there is a wage penalty for overeducated workers in at least seven fields. This study indicates that the mechanism of supply and demand for educated labour in each scientific field and industrial sector determines the wage impact of vertical educational mismatch.

[i]ORU stands for Overeducation, Required Education, and Undereducation. It is an economic model by Duncan and Hoffman (1981) that estimates the return to overeducation, required education, and undereducation

[ii]VV stands for Verdugo and Verdugo. It is the economic model that was developed by Verdugo and Verdugo (1989) to estimate the wage penalty or premiums for vertically mismatched workers (i.e., overeducated or undereducated)

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