Is there still a wage penalty for being overeducated but well-matched in skills? A panel data analysis of a Swiss graduate cohort

Using two periods’ panel data from the Swiss Graduate Survey, this study examines the incidence and wage effects of overeducation. Contrary to most prior research, we account for graduate heterogeneity in perceived skills mismatch when measuring overeducation and correct for potential omitted ability bias in the estimated pay penalty associated with overeducation. We find that graduates who are overeducated and mismatched in skills (i.e. genuinely overeducated) are the most penalized in terms of earnings. This evidence is still valid when using the fixed effects approach, while the pay penalty is no more significant for graduates who are overeducated but matched in skills (i.e. apparently overeducated). This indicates that the wage effects for apparently overeducated graduates are mainly due to the omission of unobserved ability.