Students will gather in groups of four or five to discuss the concept, the measurement and the policy implications of over-education.

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1 Session 4: Over-education Dr Amanda Gosling and Dr Yu Zhu Outline Some graduates work in where their university learnt skills are not fully exploited. Why does this happen? How much of a problem is it? What can this possible misallocation of resources tell us about the workings of the labour market? What does it tell us about how higher education should be financed? We will first examine the simple stories; over-education as a result of too many graduates or as a temporary blip while new graduates get their foot on the career ladder. How powerful are these explanations? Next we will look at supply side mechanisms. For example does a university education only benefit the better students? Should we think of education as a risky investment? Last we will look to the demand side. What could be stopping possible efficient matches between educated workers and employers that need skills? What kind of workers might be more constrained in the way they can look for jobs? Does the evidence give support to the view that education is merely a signaling mechanism (rather than enhancing your productivity)? Exercise: Students will gather in groups of four or five to discuss the concept, the measurement and the policy implications of over-education. Key references Green, F. and Y. Zhu (forthcoming 2010). Overqualification, Job Dissatisfaction, and Increasing Dispersion in the Returns to Graduate Education. Oxford Economic Papers. (Online free-access link: ) McGuiness, S. (2006) Overeducation in the labour market, Journal of Economic Surveys, 20,

We will first examine the simple stories; over-education as a result of too many graduates or as a temporary blip while new graduates get their foot on the career ladder.

2 Structure of presentation 1) Introduction 2) Facts and figures 3) What is over-education? 4) Measurement of over-education 5) Why does over-education happen? 6) How much of a problem is over-education? 7) Empirical Evidence 8) Policy implications 2

4) Measurement of over-education 5) Why does over-education

3 Introduction Over-education refers to the phenomenon by which individuals are in jobs for which they are overqualified. Over-education is a very active research field: Google Scholar keyword search returns papers in Business, Administration, Finance, and Economics; and another papers in Social Sciences, Arts and Humanities However, over-education is controversial: Lack of consensus on the concept of over-education among (labour) economists Difficulties in measurement Represents a challenge to Human Capital Theory (HCT) Facts and figures: Focus on graduate over-education Better measured than other types of over-education Important policy implications o HE expansion over the past two decades o Government policy to increase HE participation rate to 50% 3

Sciences, Arts and Humanities However, over-education is controversial: Lack of consensus on the concept of over-education among (labour) economists Difficulties in measurement Represents a

4 Snapshot of the 2008 cohort of graduates in Jan. 2009: Destinations of Leavers from Higher Education (DLHE) survey. Table 1. Comparing outcomes of 2007 and 2008 first degree graduates, six months after graduation Number responded to the destination Year survey Entering employment Entering further study/training Working and studying Unemployed at time of survey Other , % 14.1% 8.1% 7.9% 8.5% , % 13.9% 9.1% 5.5% 8.3% Source: What types of work did they go into? This is a breakdown of the types of work graduates who were working full or part time or combining work with further study in the UK went into, based on graduates men and women. Arts, design, culture, media and sports professionals 6.2% Business and financial professionals and associate professionals 7.5% Commercial, industrial and public sector managers 9.3% Education professionals 7.1% Engineering professionals 3.2% Health professionals and associate professionals 14.6% Information technology professionals 3.2% Legal professionals 0.6% Marketing, sales and advertising professionals 4.1% Scientific professionals 1.2% Social and welfare professionals 4.7% Other professionals, associate professionals and technical 5.2% Numerical clerks and cashiers 2.0% Other clerical and secretarial 8.9% Retail, catering, waiting and bar staff 10.6% Other 11.6% Unknown 0.2% Source: So 32.3% of those who were working full or part time or combining work with further study might be classified as over-educated 4

studying Unemployed at time of survey Other 2008 220,065 61.4% 14.1% 8.1% 7.9% 8.5% 2007 209,120 63.3% 13.9% 9.1% 5.5% 8.3% Source: http://www.prospects.ac.

5 How much do they earn? Table 3. Average salary of full-time, first degree leavers who entered full-time employment in the UK by type of work. Types of jobs Health professionals (eg doctors, dentists and pharmacists) 25,362 Functional managers (eg financial managers, marketing and sales managers, advertising and public relations managers, personnel managers, and information and communication technology managers) Average salary for a new graduate ( ) 23,976 Engineering professionals 23,651 Business and statistical professionals (eg accountants, management consultants, economists) 23,208 Information and communication technology professionals 22,941 Architects, town planners, surveyors 21,567 Teaching professionals (eg secondary and primary school teachers) 19,989 Science professionals 19,972 Legal professionals (eg solictors and lawyers) 19,765 Sales and related associate professionals 19,134 Design associate professionals (eg designers, including web designers) 17,829 Artistic and literary (eg artists, writers, actors, musicians, producers and directors) Social welfare associate professionals (eg youth and community workers, housing officers) 17,334 17,317 Legal assocaite professionals (eg legal executives and paralegals) 16,931 Sports and fitness 16,443 General administrative 15,374 Customer service 14,543 All 19,677 Source: 5

personnel managers, and information and communication technology managers) Average salary for a new graduate ( ) 23,976 Engineering professionals 23,651 Business and statistical professionals (eg

6 Table 1. Graduate/non-graduate level employment, six months after graduation (year of graduation ) Types of job Examples Traditional graduate Modern graduate New graduate Niche graduate Non-graduate Solicitors, research scientists, architects, medical practitioners Software programmers, journalists, primary school teachers Marketing, management accountants, therapists and many forms of engineer Nursing, retail managers, graphic designers Any jobs that do not fall into the above categories 11.1% 11.2% 11.5% 11.7% 12.4% 12.3% 12.6% 13.1% 13.8% 13.7% 14.9% 15.5% 16.0% 17.2% 16.6% 22.7% 23.3% 23.7% 23.8% 23.0% 39.1% 37.5% 35.6% 33.5% 34.3% All 100% 100% 100% 100% 100% Total in graduate 60.9% 62.5% 64.4% 66.5% 65.7% Source: Graduate job classifications were developed by Professors Peter Elias and Kate Purcell for their study Seven Years On: Graduates in the Changing Labour Market. 6

Niche graduate Non-graduate Solicitors, research scientists, architects, medical practitioners Software programmers, journalists, primary school teachers Marketing, management accountants, therapists

7 What is over-education? Over-education refers to the situation when a job-holder has an achieved qualification above that which would currently be required for someone to get the job (rather than to do the job). As such, it represents graduate labour market disequilibrium: workers possess excess educational qualifications relative to those their jobs require. Measurement of over-education Typologies of over-education: Objective measures of over-education o Required education determined on the basis of job title according to the SOC system (job title inflation will lead to under-estimation of over-education!) o Comparing the individual s education with the mean education level of his/her occupation Subjective measures of over-education o Self-assessed (by the respondent) minimum requirements of the job (to be contrasted with individual s acquired education) o Directly asking the respondent whether they are overeducated Distinction between overqualification and skill underutilization Respondent s satisfaction with the match between qualification and job (Chevalier s real and apparent over-education) Why does over-education happen? The simple story (Human Capital Theory): 7

As such, it represents graduate labour market disequilibrium: workers possess excess educational qualifications relative to those their jobs require.

8 Human Capital Theory: education determines worker s stock of HC which in turn determines marginal product; wages equate worker s marginal product; firms adapt production technology in response to changes in the supply of skilled labour. Over-education as a result of too many graduates over-flooding the labour market arising from HE expansion, or As a temporary blip while new graduates get their foot on the career ladder (life-cycle perspective), or Omitted variable problem: over-educated workers may be compensating for a lack of work-related capital (assuming education and less formal measures of HC are substitutes) Supply-side mechanisms: worker skill heterogeneity: perhaps a university education only benefits the more able students, or per-capita expenditure has fallen with increase in student numbers, so have the quality of degrees fallen? Is Education is an inherently risky investment? Demand-side mechanisms: labour market frictions preventing possible efficient matches between educated workers and employers that need skills; Some type of graduates might be more constrained in the way they can look for jobs, e.g. women with partners, e.g. Frank (1978) Does the evidence give support to the view that education is merely a signaling mechanism (rather than enhancing your productivity)? How much of a problem is over-education? Not a big deal if it is only a temporary blip; More worrying if it is persistent 8

Over-education as a result of too many graduates over-flooding the labour market arising from HE expansion, or As a temporary blip while new graduates get their foot on the career ladder (life-cycle

9 Potential costs o To society: lower national welfare, wasted government spending on education o To firms: surplus schooling associated with lower productivity (Tsang 1987); higher job turnover o To individuals: lower job satisfaction, bumping down o Raises concerns over government s HE policy Empirical Evidence Interpretation Rising unobservable ability distribution (hard to verify) Interaction between graduate education and unobservable ability Policy implications 9

satisfaction, bumping down o Raises concerns over government s HE policy Empirical Evidence Interpretation Rising

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