Educational mismatches of newly hired workers: Short‐ and medium‐term effects on wages

Abstract

This paper examines the short‐ and medium‐term effects of over‐ and undereducation on individual wages using a matched employer–employee dataset from 1998 to 2012 and a novel measure of educational mismatch based on the flows of newly hired workers. The findings reveal that the wage differential between adequately matched and mismatched workers decreases substantially once the unobserved heterogeneity of the worker and the firm is considered. Workers' unobserved characteristics explain a large proportion of both the overeducated wage penalty and the undereducated wage premium. Additionally, variations in firms' pay policies contribute to the wage gap among mismatched workers. Finally, findings show that job mismatches have the greatest impact on early‐career individuals' wages.