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Wage Effects of Educational Mismatch According to Workers’ Origin: The Role of Demographics and Firm Characteristics

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Abstract

This paper analyses the wage effects of educational mismatch by workers’ origin using a sizeable, detailed matched employer–employee dataset for Belgium. Relying on a fine-grained approach to measuring educational mismatch, the results show that over-educated workers, regardless of their origin, suffer a wage penalty compared to their well-matched former classmates. However, the magnitude of this wage penalty is found to vary considerably depending on workers’ origin. In addition, the estimates show that origin-based differences in over-education wage penalties significantly depend on both demographics (workers’ region of birth, education, gender and tenure) and employer characteristics (firm size and collective bargaining). To our knowledge, the role played by these different moderating variables has been either little or not explored in this context before.

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Notes

  1. If the comparison group consists of well-matched former classmates rather than well-matched colleagues.

  2. By developing countries, we refer to both transition and developing countries, as listed in the UNCTAD (2020) classification.

  3. A detailed description of these country categories is provided in “Appendix 1”.

  4. A further, non-negligible, explanation—besides human capital theory—is that collective labour agreements generally provide for normative pay scales in terms of wage levels and progression (e.g. promotion, seniority), especially for white-collar workers in the Belgian context (Garnero et al., 2020).

  5. Note that when faced with multi-modal values for education level, we use the lowest value. However, as this may slightly overestimate the number of over-educated workers, we performed a robustness check by taking the highest modal value (which potentially tends to underestimate the number of over-educated workers). The results, available on request, show that the conclusions remain unchanged when we rely on the highest modal value.

  6. Information on workers’ educational attainments, available in 7 categories in our dataset, has been reported by firms’ HR departments (based on their registers). We converted that information into years of education, applying the following rule: (i) primary education: 6 years of education; (ii) lower secondary education: 9 years; (iii-iv) general, technical, and artistic upper secondary education: 12 years; (v) higher university and non-university education, short type: 15 years; (vi) university and non-university education, long type: 17 years; and (vii) postgraduate education: 18 years. Given that information on workers’ levels of education was provided by firms’ HR departments, these levels might be somewhat under-estimated for immigrants. The findings reported in this paper should therefore be considered as a lower bound.

  7. We have classified the age groups as follows: 15–29; 30–34; 35–39; 40–44; 45–49; and 50 + . The thresholds were chosen to ensure a sufficient percentage of observations in each category and to have a fairly even distribution of observations.

  8. It covers the following sectors: (i) mining and quarrying (B); (ii) manufacturing (C); (iii) electricity, gas, steam and air conditioning supply (D); (iv) water supply, sewerage, waste management and remediation activities (E); (v) construction (F); (vi) wholesale and retail trade, repair of motor vehicles and motorcycles (G); (vii) transportation and storage (H); (viii) accommodation and food service activities (I); (ix) information and communication (J); (x) financial and insurance activities (K); (xi) real estate activities (L); (xii) professional, scientific and technical activities (M); and (xiii) administrative and support service activities (N).

  9. Specifically, the minimum number of observations per cell is 10, while the maximum is 16,522. This results in a mean of 279.7 observations for each cell.

  10. Gross hourly wages have been deflated to constant prices of 2004 by the consumer price index taken from Statistics Belgium.

  11. As in many Western European countries, collective bargaining in Belgium occurs at three levels: the national (interprofessional) level, the sectoral level, and the company level. It generally occurs every two years on a pyramidal basis. In principle, it starts with a national collective agreement defining minimum wages and a margin for wage increases that may be bargained at lower levels. Next, this national agreement is improved within every sector of activity. Sector-level agreements are concluded within Joint Committees that bring together employer and union representatives. They set industry-wide standards, including very detailed pay scales, for all workers covered by the Joint Committee. Finally, firm-level agreements can complement sector-level agreements, and set wages and working time, as well as work organization and other aspects of the working life when a union delegation is present. However, in case of diverging standards between different agreements covering the same workers, the conditions that are the most favourable to employees apply (i.e. the so-called ‘favourability principle’), and firms do not have the possibility to derogate from sector-level agreement as it is the case in Germany, for instance, through so-called ‘opening clauses’. Therefore, firm-level bargaining in Belgium can only improve (or confirm) the conditions set in the sectoral agreement. For more details on the collective bargaining system in Belgium, see Garnero et al. (2020).

  12. Under-education may notably result from labour shortages (i.e. bottleneck vacancies) and technologically-induced changes in job content and complexity.

  13. The SES is conducted on the basis of a two-stage random sampling approach of enterprises or local units (first stage) and employees (second stage). The establishments, randomly chosen from the population, report data on a random sample of their workforce. The SES is thus a stratified sample. The stratification criteria refer to the region where the local unit is located (Nomenclature of Territorial Units for Statistics (NUTS) categories), the principal economic activity (NACE groups) and the size of the local unit (this size is determined by data collected from the Social Security Organization). Sampling percentages of local units depend positively on the size of the unit. Within a local unit, the number of workers to be considered also depends on size but negatively. Because of this sampling strategy, weights have to be used to extrapolate employees and local units in the sample to the entire stratum. For more details, see Demunter (2000).

  14. The estimated parameters of our control variables (available upon request) are generally significant and are consistent with the results reported in the literature. In particular, regardless of the origin, we observe that women suffer from a wage penalty and that being employed in the same firm for at least 10 years increases the wage. This latter finding is compatible with the asymmetrical information on workers’ true productivity, as highlighted by Allen and van der Velden (2001) and Tsai (2010). The type of contract also has an impact on wages, which are lower in the case of non-open-end contracts. Finally, wages increase with the size of the firm and in the presence of a firm-level collective agreement, which is consistent with the findings of Lallemand et al. (2007) and Garnero et al. (2020), for instance.

  15. The mean educational attainment is 11.8 years for workers coming from developed countries, compared to 9.8 years for those coming from the Middle and Near East, 10.6 years for those coming from Eastern Europe, 10.7 for those coming from Africa, 11.6 years for those coming from Asia, and 12.1 years for those coming from Latin and Central America.

  16. In “Appendix 2”, we further rely on the Oaxaca-Blinder (1973) method to decompose the developed-developing wage gap into two parts: a part explained by differences in observable productive characteristics and a part that can be attributed to differences in returns to those characteristics (i.e. the so-called ‘unexplained’ part). We run this decomposition on the subsamples of adequately educated workers (column (1) of “Appendix 2”) and of over-educated workers (column (2)), respectively. Regarding the sample of workers with the adequate level of education, the results show that differences in returns to observable characteristics account for slightly less than a third (i.e. 29%) of the overall wage gap. In contrast, when taking the sample of over-educated workers into account, the unexplained part amounts to 53%. Although not all variables reflecting workers’ productivity could be included in our regression (information on knowledge of languages is notably missing), these results suggest that wage discrimination on the basis of origin is more prevalent among over-educated workers than among workers with the required level of education for their job.

  17. As a sensitivity test, we also estimated an ORU specification separating workers born in Belgium from those born in other developed countries. The estimates (available on request) show that the returns to over-education are comparable for these two groups of workers, and significantly larger than those estimated for workers born in developing countries. Therefore, for the sake of brevity and clarity, especially when focusing on the role of moderating variables, we have chosen to group together workers born in Belgium and those born in other advanced economies. This choice is also likely to facilitate the comparison of our results with those of other studies that focus specifically on the situation of over-educated workers born in developing countries.

  18. Because the estimates of the dummy specification are less precise, and for the sake of conciseness, in the remainder of this paper we will directly focus on results obtained with the Mincer and ORU specifications. However, the estimates of the dummy specification are reported in “Appendices 3 and 4”. Overall, they corroborate our main conclusions.

  19. The ‘OE/RE ratio’ variable measures the ratio of the return to over- and required education, respectively. Therefore, the smaller the value of this variable, the larger the over-education wage penalty.

  20. However, these results should be taken with caution as over-educated female workers born in developing countries only represent 5% of the sample of workers originating from these countries.

  21. This outcome is consistent with the results obtained by Daly et al. (2000) and Ren and Miller (2011).

  22. We also performed a sensitivity analysis to test whether the results remain stable when we fix the threshold at 5 years of tenure, instead of 10 years. Overall, and with respect to over-education, the results, available on request, lead to similar conclusions whether one takes a 5- or a 10-year threshold. That said, while the return to an additional year of over-education increases similarly with the number of years of tenure for both categories of workers when considering a 10-year tenure threshold, a result which we have linked to statistical discrimination theory, this is no longer the case when considering a 5-year threshold, since the return to over-education does not yet increase after 5 years of tenure for workers from developing countries. This seems to suggest that some time is needed for the information asymmetry to decrease for this category of workers.

  23. Overall, results obtained with the dummy specification are quite consistent with those presented in this section.

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Acknowledgements

We would like to thank the Editor (Arthur van Soest) and two anonymous referees for their useful suggestions on an earlier version of this paper. We are also most grateful to Statistics Belgium for giving access to the data. Financial support from the Belgian Federal Science Policy Office (BELSPO, IMMILAB project) is also kindly acknowledged.

Funding

This work was supported by the Belgian Federal Science Policy Office under Grant [IMMILAB].

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Correspondence to V. Jacobs.

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Appendices

Appendix 1: Description of country categories (based on UNCTAD, 2020)

  1. (a)

    Developed countries

Western Europe Andorra, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Liechtenstein, Luxembourg, Monaco, the Netherlands, Norway, Portugal, San Marino, Spain, Sweden, Switzerland, and the United Kingdom.

Eastern Europe (EU-13) Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, and Romania.

North America and South Pacific Australia, Canada, French Polynesia, Hawaii, New Zealand, New Caledonia, Papua New Guinea, Tahiti, the United States of America, and Wallis and Futuna.

Japan Japan

  1. (b)

    Developing countries

Africa Algeria, Angola, Burundi, Cameroon, Cote d’Ivoire, Democratic Republic of the Congo, Ghana, Libya, Mauritania, Morocco, Nigeria, Rwanda, Senegal, South Africa, Togo, etc.

The Middle and Near East Afghanistan, Brunei Darussalam, Cyprus, Egypt, Iran, Iraq, Israel, Jordan, Kuwait, Palestine, Saudi Arabia, Syria, Turkey, the United Arab Emirates, and Yemen.

Asia Bangladesh, Cambodia, China, India, Indonesia, Japan, Laos, Philippines, South Korea, Taiwan, Thailand, Vietnam, etc.

Eastern Europe (non-EU) Albania, Armenia, Kazakhstan, Kosovo, Russia, and Serbia.

Latin and Central America Argentina, Bolivia, Brazil, Chile, Colombia, Cuba, the Dominican Republic, Ecuador, Guatemala, Mexico, Nicaragua, Peru, Venezuela, etc.

Note: by developing countries, we actually refer to both transition and developing countries listed in the UNCTAD (2020) classification.

Appendix 2

See Table

Table 6 Oaxaca-Blinder wage decompositions

6.

Appendix 3

See Table

Table 7 Returns to attained, required and over-education—dummies specification: The role of demographics

7.

Appendix 4

See Table

Table 8 Returns to attained, required and over-education—dummies specification: The role of firm characteristics

8.

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Jacobs, V., Rycx, F. & Volral, M. Wage Effects of Educational Mismatch According to Workers’ Origin: The Role of Demographics and Firm Characteristics. De Economist 170, 459–501 (2022). https://doi.org/10.1007/s10645-022-09413-9

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