Signalling and Productivity Effects of Overeducation: Is It Really a Waste of Resources?

Abstract

Overeducation raises concerns that governments may be overinvesting in education. To inform the debate, this paper studies the impact of overeducation on productivity. We advance the literature by considering that returns to overeducation may be due both to productivity and signalling effects. To disentangle both effects, we apply Wolpin’s (1977) methodology and compare the rates of return of screened (employed) and unscreened (selfemployed) workers. To overcome well-known endogeneity problems due to unobserved heterogeneity, we estimate a panel with individual and employment-status fixed effects. Our results show that signalling effects are relevant and that overeducation does not carry a productivity penalty. Keywords: Overeducation, signalling model, human capital model, unobserved heterogeneity. JEL classification: I20, J24, J31.