Skill vs Education Types of Labour Mismatch and Their Association with Earnings

Abstract

This paper analyses the distinction between educational and skill types of labour mismatch and their association with earnings. Drawing on cross-sectional data for 26 countries from the 1st Cycle of the OECD (2012) Survey of Adult Skills (PIAAC), I examine educational and skill mismatch using a comprehensive set of education- and skill-based indicators, explore heterogeneity across worker characteristics, and investigate the sources of conflicting country-level correlations with earnings through an error components model. The results show that country-level unobserved heterogeneity induces endogeneity bias, with both its direction and magnitude varying across mismatch measures. Once unobserved heterogeneity is controlled for, over-education and over-skilling are associated with wage penalties, whereas under-education and under-skilling are linked to wage premiums. These findings highlight both conceptual and empirical distinctions between educational and skill mismatch and demonstrate the importance of indicator choice in the analysis.