Abstract
We build a model to understand educational mismatch and income inequality among highly educated workers. For occupations and workers with college majors, educational mismatch negatively impacts wage but positively correlates with wage inequality. We examine different channels that contribute to wage inequality by identifying three underlying reasons behind the mismatch, namely, preference, promotion, and search friction and quantifying their impacts. Quantitatively, preference and promotion negatively contribute to an inequality increase from 1990 to 2000; match premium and search friction contribute to a 28.4% and 5.3% increase in inequality, respectively. We conclude that educational mismatch significantly affects income inequality and that this impact varies based on the underlying reasons. The study has important policy implications as it shows that policies for improving education match rate and educational signaling and less market friction can reduce wage inequality.
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