Chapter 3. Overeducation and Mismatch in the Labor Market

This chapter surveys the economics literature on overeducation. The original motivation to study this topic reports that the strong increase in the number of college graduates in the early 1970s in the United States led to a decrease in the returns to college education. We argue that Duncan and Hoffman's augmented wage equation—the workhorse model in the overeducation literature—in which wages are regressed on years of overschooling, years of required schooling, and years of underschooling is at best loosely related to this original motivation. Next, we discuss how overschooling and underschooling at the level of individual workers have been measured, and what the incidence of overschooling and underschooling is. We then analyze in more detail Duncan and Hoffman's wage equation. We discuss the potential problems with it due to endogeneity and measurement error, and we review the results from earlier studies using this specification. We conclude that because of the issues concerning endogeneity and measurement error, the estimated returns to required/under/overschooling cannot be interpreted as causal.