Shadow prices and costs of overeducation. Dieter Verhaest * Eddy Omey

Transcription

1 Shadow prices and costs of overeducation Dieter Verhaest * SHERPPA (FEB, Ghent University) Address: Ghent University Hoveniersberg Gent Eddy Omey SHERPPA (FEB, Ghent University) Address: Ghent University Hoveniersberg Gent * Correspondence to: Dieter Verhaest, Ghent University, Hoveniersberg 24, 9000 Ghent, Belgium. Dieter.Verhaest@UGent.be; Fax.: We thank Dirk Van de gaer for his helpful comments on an earlier draft of this paper. The research benefited from financial support of the Fund for Scientific Research Flanders (FWO Vlaanderen), the Flemish Ministries of Science and Technology and Education (PBO 1997 and 1998) and the Federal Public Planning Service Science Policy (Interuniversity Attraction Poles Program - Belgian Science Policy [Contract No. P5/21]).

2 Shadow prices and costs of overeducation Abstract We examine, for a sample of school leavers, the relation between overeducation and job satisfaction by computing net and brut shadow prices (NSPOV and BSPOV) and costs (NSCOV and BSCOV) of overeducation. We differentiate between direct psychological effects and indirect effects via compensation i.e. earnings, autonomy, promotion opportunities and job security. Overeducated workers have less compensation than adequately educated workers with a similar education, but more compensation than adequately educated workers in a similar job. A 29% wage increase is needed to compensate the psychological costs of one year of overeducation (NSPOV). To pay off the total costs of overeducation, a 39% wage increase is required (BSPOV). To compensate the lower utility of workers with one year of overeducation in comparison with adequately educated workers in similar jobs, a 36% wage increase is needed (NSCOV). After subtracting actual compensation, the wage increase at rest is 26% (BSCOV). These outcomes demonstrate that overeducation is largely involuntary and may have negative productivity consequences. Keywords: overeducation, mismatch, underemployment, job satisfaction, well-being, shadow price 2

3 I. Introduction While research on the relation between overeducation and job satisfaction has a long tradition in the psychological literature, economic studies on this issue are rather limited. Nevertheless, this focus delivers several interesting insights into the economic dynamics behind the phenomenon of overeducation. Firstly, the relation between overeducation and job satisfaction enables to assess the voluntariness of overeducation. Since unemployed people are less happy, Clark and Oswald (1994) concluded that unemployment is largely involuntary. To escape from unemployment, job seekers may accept involuntary a job below their educational level. Consistent with the premise that overeducation is involuntary is that overeducated workers are less satisfied than adequately educated workers with a similar educational background. Sicherman and Galor (1990) conversely state that overeducation is voluntary since it is an investment in experience. Secondly, it may shed more light on the negative productivity consequences of overeducation (Tsang and Levin, 1985). Job satisfaction influences productivity both indirectly through lower quit rates (Freeman, 1978) and directly through higher worker performance (Iaffaldano and Muchinsky, 1985). Consistent with the supposition that overeducated workers are less productive is that overeducated workers are less satisfied than adequately educated workers in similar jobs. Satisfaction gets a theoretical meaning if it is interpreted as a reflection of utility (Clark and Oswald, 1996). One dichotomy in social sciences concerns the supposition that utility depends on the individuals absolute or relative position (Clark and Oswald, 1998). Traditionally, economists generally accepted the former view by modelling economic agents behaviour in function of absolute levels of income. Advocates of the latter view are generally found among sociologists, who attach much attention to socio-economic status compared to peers as a determinant of behaviour (see, e.g., Festinger, 1954). Both views predict that overeducated individuals have lower satisfaction levels than adequately educated individuals with a similar educational background. Contrary to the economist view, the sociologist view may also predict lower satisfaction levels compared to adequately educated colleagues in similar jobs. This is the case if their peer group consists of former classmates (King and Hautaluoma, 1987). This view is 3

4 also consistent with equity theory (Adams, 1963), which states that satisfaction depends on the ratio of inputs to outputs. Or with the view of Wilson (1967) that subjective well-being depends on the gap between aspirations and actual realisations. Contrary to the impact from social comparisons, these two last directly result from the causal impact of overeducation via underutilization or overinvestments in skills. Not surprisingly, the supposition that overeducated individuals are less satisfied than adequately educated workers with a similar educational background has been largely confirmed by previous empirical research (Tsang, 1987; Feldman and Turnley, 1995; Battu et al., 2000; Allen and van der Velden, 2001; Ahn et al., 2001; Verhofstadt and Omey, 2003; Verhaest and Omey, 2005). The comparison with adequately educated colleagues in similar jobs delivered less consistent outcomes. For this comparison, Hersch (1991) noted lower satisfaction levels among overeducated workers. Also Tsang et al. (1991) and Verhaest and Omey (2005) found evidence on this relation. However, the relation was only significant for some of their estimations. Particularly evidence on the basis of objective overeducation measures is limited. Additionally, most other studies supported the economist view by finding no evidence on lower job satisfaction levels (King and Hautaluoma, 1987; Khan and Morrow, 1991; Groot and Maassen van den Brink, 2000; Büchel, 2002). This lack of evidence tempted Büchel (2002) to the conclusion that assumptions of personnel managers about the lower productivity of overeducated workers should be reconsidered. However, two points are largely neglected in the literature on job satisfaction and overeducation. The first point concerns the influence of compensating factors. It is generally found that overeducated workers earn more than their adequately educated colleagues (see Hartog, 2000). Overeducation may also be compensated in alternative ways. According to van der Meer and Wielers (1996), overeducated workers are particularly hired for jobs with difficulties to measure individual productivity. Bulmahn and Kräkel (2002) state that overeducated workers are more able to offer improvisatory solutions in the case of crisis situations. Both arguments imply that overeducated workers need less supervision and get a higher degree of autonomy. The impact of autonomy on job satisfaction is well known from the psychological literature (see Karasek, 1979). Overeducated workers may also have a higher degree of job security. Gautier et al. (2002) noted at 4

5 each level of job complexity a higher degree of turnover among lower educated workers. Also the strong relation between job security and satisfaction is well documented in the literature (see Burchel, 1994). Finally, Sicherman and Galor (1990) suppose in their career mobility theory that overeducated individuals are offered more promotion opportunities. So, differential wages, autonomy, job security or promotion opportunities may all work as compensators for overeducation and mask the true impact of overeducation on job satisfaction. The second point concerns the impact of the sample being analysed on the outcome of the analysis. Most studies are based on data for the whole labour force, and not on a sample of new hires. The outcomes for the whole labour force may differ from those of new hires for two main reasons. The negative impact from overeducation on job satisfaction may be heterogeneous. Especially workers that experience a large negative effect on their job satisfaction from being overeducated may select themselves out of their job. For representative labour force data, only a small or even no impact on job satisfaction is noted. An alternative explanation is given by setpoint theories of subjective well-being. According to these theories, people have some baseline satisfaction level. Individuals react initially to an event, but then return to their baseline level of satisfaction (Headey and Wearing, 1989). So, overeducation may have a temporary effect on the individuals job satisfaction. Also in this case, only a small impact may be noted for a sample of the whole labour force. The aim of this paper is twofold. Firstly, we investigate the impact of overeducation on job satisfaction by taking the two neglected points from the literature into account. Job satisfaction equations without and with compensation factors are estimated. So, we discriminate between the net and brut impact of overeducation. Additionally, we base the analysis on data for school leavers and thus newly hired workers. Apart from overall job satisfaction, also satisfaction with 12 different job items is analysed. Secondly, we assess the voluntariness and possible productivity effects of overeducation. To do so, overeducated workers are compared both to adequately educated workers with similar years of attained education and adequately educated workers with similar years of required education. We quantify the impact of overeducation on utility in terms of net and brut shadow prices and shadow costs. The shadow price of overeducation is defined by the 5

6 wage increase that is needed to compensate the psychological costs of becoming overeducated. We define the shadow cost as the wage increase that is needed to compensate the utility difference between overeducated workers and adequately educated workers in similar jobs. The article is structured as follows. In section II, our methodology is outlined. The data and variable measurement are described in section III. In section IV, we give an overview of the estimation results. The shadow prices and costs of overeducation are computed in section V. Finally, in section VI, we discuss the results and make some general conclusions. II. Methodology Following Clark and Oswald (1996), we suppose that the individuals job satisfaction JA i is a reflection of an underlying latent variable that measures his/her utility from this job is modelled by the following equation: U i. Job utility (1.01) Ui = β1 + β2yeduci + β3yreqi + β4yoveri + β5yunderi + β6ci + β7 X i + εi With YREQ = years of required education, YEDUC = years of education, YOVER = years of overeducation, YUNDER = years of undereducation, C = a vector of compensations, and X = a vector of other individual and job characteristics. According to social comparison theories, individuals compare their own status with the status of their peers. Supposing that the peer group consists of their former classmates, this effect is reflected in the coefficient of YEDUC. If mean job quality is positively related to the educational level of the worker, β 2 is negative. It then simply reflects the opposite of the differences in mean job quality by educational level. Its impact is to change the intercept: the higher the educational level, the lower the individuals starting utility level. The interpretation of β 3, β 6, or β 7 is clear: they reflect the change in utility from a change in the absolute level of YREQ, C, or X. Finally, β 4 and β 5 reflect the direct impact of over- and undereducation, i.e. the impact that is independent 6

7 from social comparisons. The direct impact of overeducation may result from the effect of underutilizations or underinvestments of skills, which we expect to be negative. Similarly, β 5 reflects the direct impact from undereducation. Given that YEDUCi YREQi + YOVERi YUNDERi, (1.01) is not directly estimable. However, it can be reduced to the following two equivalent alternatives: (1.02) Ui = β1 + ( β2 + β3) YEDUCi + ( β4 β3) YOVERi + ( β5 + β3) YUNDERi + β6ci + β7 X i + εi (1.03) Ui = β1 + ( β3 + β2 ) YREQi + ( β4 + β2 ) YOVERi + ( β5 β2 ) YUNDERi + β6ci + β7 X i + εi Both equations have a straight interpretation. Equation (1.02) compares over- and undereducated workers with adequately educated workers that have similar years of education. The coefficient of YOVER reflects the psychological costs of becoming overeducated and consists of the sum of the direct impact of one year of overeducation β 4, and the impact of working at a lower job level β 3. Equation (1.03) compares over- and undereducated workers with adequately educated workers that have similar years of required education. This comparison is relevant from the firms point of view since it reflects the difference in satisfaction between overeducated and adequately educated workers in similar jobs. This difference consists of the sum of the direct impact of one year of overeducation β 4, and the impact of being in a different comparison group β 2. Finally, the coefficient of YREQ or YEDUC reflects the combined effect of working at a higher job level β 3 and having a higher educational level β 2. The coefficients of YOVER in equations (1.02) and (1.03) reflect only the net, psychological impact of overeducation. Overeducation may also have an additional effect through its impact on the compensation level. Suppose that the level of C depends on the following two equivalent specifications: (1.04) Ci = δ1 + δ 2YEDUCi + δ3yoveri + δ 4YUNDERi + δ5 X i + δ6i 7

8 (1.05) Ci = δ1 + δ 2YREQi + ( δ3 + δ2 ) YOVERi + ( δ 4 δ 2 ) YUNDERi + δ5 X i + δ6i Then, the brut impact consists of the sum of the psychological impact and the compensation impact of becoming overeducated. This last term equals δ 3 (i.e. the impact of one year of overeducation on the compensation level) times β 6 (i.e. the impact of the compensation level on utility). Similarly, the brut difference of utility between overeducated workers and their adequately educated colleagues consists of sum of the net difference and the compensation difference. It is difficult to assess the true impact of overeducation on the basis of the coefficients alone, since their size does not correspond to a clear unit of measurement. A simple way of quantifying the real effect is the computation of a shadow price on the basis of regression results (cf. Clark and Oswald, 2002). Suppose that C measures the wage level of the worker, we can define the following shadow prices and costs: (1.07) NSPOV = ( β4 β3) / β6 (1.08) BSPOV = (( β4 β3) + β6δ3) / β6 (1.09) NSCOV = ( β4 + β2 ) / β6 (1.10) BSCOV = (( β4 + β2 ) + β6 ( δ3 + δ2 )) / β6 The net or brut shadow price of overeducation (NSPOV or BSPOV) amount to the wage increase that is needed to compensate respectively the psychological or total costs of becoming overeducated. Supposing that workers productivity depends on his/her satisfaction level, we can also define the net or brut shadow cost of hiring an overeducated worker (NSCOV or BSCOV). This is defined by the wage increase that is needed to compensate overeducated workers for their lower utility level in comparison with adequately educated workers; or the wage increase that is needed to neutralize the negative impact on productivity. The NSCOV quantifies the total uncompensated difference in utility, while the BSCOV takes actual compensation into account. 8

9 III. Data and measurement The analysis is based on the first two cohorts of the SONAR-data about the transition from school to work in Flanders. The first cohort of school leavers was born in 1976, and interviewed at the end of Also data of a follow-up survey, conducted at the end of 2002, are available. The second cohort was born in 1978 and interviewed at the end of For the first job after leaving school, i.e. the first job of at least one hour a week and tenure of at least one month, these data deliver extended information on the overeducation status and on job satisfaction. Those with a job entered the labour market over the period The self-employed and those with a job outside Flanders or Brussels are excluded from the analysis. After excluding observations with missing values on any of the used variables, the sample for the overall satisfaction analysis is reduced to 4157 respondents. For an extensive description of data collection and processing, see SONAR (2002, 2003, 2004). Job satisfaction is derived from the following survey question: During the early phase of your first job, how satisfied were you with the following items of your job?. Respondents could answer on a scale from 1 (very unsatisfied) to 5 (very satisfied). Only for the first wave of the 1976 cohort, also the category not applicable was an answer category. For the other surveys, these answers should have been reported as missing values. The job satisfaction items to be evaluated were: (1) wage, (2) job security, (3) holiday arrangement, (4) the content of the job, (5) direct chef, (6) colleagues, (7) promotion opportunities, (8) physical working conditions, (9) work pressure, (10) working hours arrangement, (11) learning opportunities, (12) opportunities to take initiative, and (13) job as a whole. The determinants of job satisfaction are estimated on the basis of ordered probit models. Overeducation is measured on the basis of a job analysis measure (JA). This measure is derived from the 1992 Standard Occupation Classification of the Dutch CBS (2002). This is a detailed classification, based on a five-digit code and five job levels: elementary, lower, medium, higher and scientific. The corresponding educational levels are: less than lower secondary (<LS), lower secondary (LS), higher secondary (HS), lower tertiary (LT) and higher tertiary education 9

10 (HT). The equivalent years of attained and years of required education are based on the normal study length of each educational level: <LS = 6 years, LS = 10 years, HS = 12 years, LT = 15 years, and HT = 16 years. A comparison of the years of required and years of attained education delivers a measure for years of over- and undereducation. We prefer the objective JA method for three reasons. Firstly, this measure reflects the core idea of overeducation in the literature: an educational level that exceeds the required level to do the job (Hartog, 2000). Secondly, a subjective measure on the basis of the required level to do the job is not available in the first wave of the 1996 cohort. Thirdly, subjective overeducation may be spuriously correlated with job satisfaction due to common-method bias (Verhaest and Omey, 2004a). Respondents were asked to report the net starting wage of their first job. For the 1976 wave, at 23, respondents were asked to report the official net monthly wage in intervals of 5.000BEF for lower wages and intervals of BEF for higher wages. For the survey at 26 and the 1978 wave, the exact net monthly wage was reported. If respondents refused to answer, they got the interval question. Using the midpoint of each interval for the estimation of the wage equation does not result in consistent estimates (Stewart, 1983). We estimate an interval regression, which uses the conditional expectation of the LN of each observation. This enables us to combine both point and interval observations (see STATA, 2003). The answers are deflated and converted into hourly earnings. The conditional expectation (LNWAGE) is also used as determinant in the satisfaction analysis. We suppose that the marginal utility of earnings is decreasing, what is consistent with findings in the empirical literature (see Argyle, 1999). Likewise, shadow prices and costs are expressed in terms of % wage increases 1. The autonomy, promotion opportunity and job security indicators are based on subjective scale answer questions. Scale answers in surveys are highly interrelated and result in spurious correlation between the items to be measured. This survey bias may overestimate the true impact 1 This makes the outcomes less sensitive to average income levels and enhances the comparability of the computed figures across time and culture. For a discussion of the merits and limitations of the applied method, see Veenhoven (2002). 10

11 of these items on job satisfaction. To reduce common-method bias, these variables are measured on the basis of dummies. The measure for autonomy (AUTONOMY) is based on the following three questions: Do you totally disagree, rather disagree, rather agree, or totally agree: in my first job, I could choose (1) how much work I did on a day, (2) which work I did on a day, (3) the way I did my work. Respondents that agreed on each of these three questions are supposed to have had a job with autonomy. The data do not contain direct questions on promotion opportunities or job security. We base our measures on the job satisfaction answers for these two job items. All those who rated their promotion opportunities satisfaction more than 1 (very unsatisfied) are supposed to have had at least some promotion opportunities (PROMOPP). A similar criterion is used with respect to job security (JOBSECURITY) 2. The determinants of autonomy, promotion opportunities or job security are estimated on the basis of binary probit models. As control variables (X), the following determinants are included in each estimation: dummies for gender (1 dummy), non-european descent (1), firm size (4), industry (12), professions (3), shift-work (1), night-work (1), temporary (1) and part-time contract (1). Some studies on the impact of overeducation on job satisfaction found different outcomes for men and women (see, e.g., Tsang et al., 1991). So, we also report separate shadow prices and costs for men and women. Several sources of bias may lead to an over- or underestimation of the shadow prices and costs. In the last section of the paper, we execute some robustness checks. A misspecification of the wage variable will lead to an overestimation of the figures. Job satisfaction may depend on the absolute wage level (WAGE) or comparison wage (COMPWAGE) instead of LNWAGE. For the COMPWAGE specification, we use the modal wage by educational level as reference. Also the interval nature of the wage observations may lead to overestimation of shadow 2 Both items have a substantial number of non applicable (first survey) or missing (other surveys) reports. We suppose that large number of individuals with no promotion opportunities or no job security answered in this way. We assign them a value of 0 for PROMOPP or JOBSECURITY. The small numbers of these types of answers on items that apply to every job (e.g. wages: 3; job as a whole: 8) show that this assumption is realistic. 11

12 prices and costs. An alternative estimate is based on point observations of wages only. Measurement error in the measure of required education may underestimate the figures. Additionally, job satisfaction may rather depend on the perception of being overeducated instead of the objective overeducation status. Shadow prices and costs are recalculated by using the JA measure as an instrument for a subjective measure of the required level to do the job (RL). In this way, we control for measurement error and possible endogeneity of the RL measure, without introducing the measurement error of the JA measure (Verhaest and Omey, 2004a). A two-step approach is applied to ensure that YEDUCi YREQi + YOVERi YUNDERi and that years of over- and undereducation are not negative. RL years of required education are regressed on JA years of required education. This model is used to predict years of required, over- and undereducation. IV. Estimation results In this section, we give an overview of the estimation results. Consecutively, we discuss the regression results of the overeducation compensators, satisfaction with the different job items, and overall job satisfaction. A. Overeducation compensators Table 1 reports the estimation results for the impact of overeducation on wages, autonomy, promotion opportunities, and job security. The results are fairly similar for every outcome variable. Overeducated workers earn more, have more autonomy, more promotion opportunities and higher job security than adequately educated workers who work in jobs with similar years of required education. However, they earn less, have less autonomy, less promotion opportunities and less job security than adequately educated workers with similar years of attained education. So, the negative impact from the lower job level on wages, autonomy, promotion opportunities and job security is only partially compensated for overeducated workers. 12

13 Table 1 here B. Satisfaction with job items In comparison with adequately educated workers with similar years of attained education, overeducated workers are significantly less satisfied with their wages, holiday arrangement, job content, promotion opportunities, physical working conditions, learning opportunities and opportunities to take initiative (cf. table 2). They are equally satisfied with their job security, direct chef, colleagues, work pressure and working hours arrangement. In comparison with adequately educated workers with similar years of required education, they are more satisfied with their job security, direct chef, promotion opportunities and work pressure. They are equally satisfied with their wages, holiday arrangement, colleagues, physical working conditions, working hours arrangements, learning opportunities and opportunities to take initiative. They show only lower satisfaction with the content of their job. Table 2 here The coefficients change substantially if the compensation variables are included in the models. When years of required education is controlled for, also the coefficients for satisfaction with wages, holiday arrangement, learning opportunities and opportunities to take initiative become significantly negative. So, the lower satisfactions of overeducated workers with these items are completely compensated. Additionally, the positive coefficient for satisfaction with their direct chef, promotion opportunities and work pressure disappeared. Thus, higher satisfaction with these items results from a higher compensation level. When years of attained education are controlled for, the negative impact from overeducation on wage satisfaction becomes insignificant. Additionally, the coefficient of years of attained education for this item is now significantly negative. These last findings are consistent with two suppositions underlying our analysis: (1) overeducated workers compare themselves to workers with similar years of attained education, 13

14 and not to workers with similar years of required education; and (2) higher educated school leavers have more aspirations, leading to a lower starting level of utility. C. Overall job satisfaction In line with the literature, we find that overeducated workers are less satisfied in comparison with adequately educated workers with similar years of attained education (cf. table 3). Furthermore, for our sample of school leavers, overeducated workers are also less satisfied in comparison with adequately educated workers who work in similar jobs. Each compensator significantly improves the model and changes the overeducation coefficient in the same direction. When years of attained education are controlled for, the coefficient of overeducation diminishes somewhat. Thus, overeducation has both a direct psychological impact and an indirect impact through a lower compensation level. Oppositely, when years of required education is controlled for, the overeducation coefficient increases. Thus, the lower overall satisfaction of overeducated workers in comparison with adequately educated workers who work in similar jobs is only partially compensated through a higher compensation level. The coefficient for years of education changes from significantly positive to insignificantly negative. So, the positive effect from the job level is compensated by the negative effect from education-related social comparisons. Table 3 here V. Shadow prices and costs To assess the impact of overeducation on overall job satisfaction, shadow prices and costs are calculated. Firstly, we discuss the figures based on the previously reported estimates. Secondly, separate figures for men and women are computed. Thirdly, the robustness of the results is tested. Therefore, we compute some figures on the basis of alternative estimation specifications. 14

15 A. Basic results Table 4 reports the shadow prices and costs that are calculated on the basis of the previously reported results. Since these estimations are based on LNWAGE, they can easily be transformed into % wage changes. To compensate the psychological costs of 1 year of overeducation, i.e. the net shadow price of overeducation (NSPOV), a net wage increase of 29.0% is needed. To compensate the total costs of 1 year of overeducation, i.e. the brut shadow price of overeducation (BSPOV), even a wage increase of 38.9% is needed. For the sample mean individual, this amounts to a net monthly wage increase of 387. The lower utility of workers with 1 year of overeducation in comparison with adequately educated workers is compensated by a wage increase of 35.8%, i.e. the net shadow cost of overeducation (NSCOV). However, only partial compensation occurs and an additional wage increase of 25.7% is needed, i.e. the brut shadow cost of overeducation (BSCOV), to reach full compensation. Table 4 here The BSPOV and NSPOV are decomposed to assess the contribution of psychological and other indirect compensation factors (cf. table 5). About 77% of the total costs of overeducation are psychological. These psychological costs have two components: the direct impact from overeducation and the impact from working at a lower job level. The remaining part is explained by the negative impact of overeducation on the compensation level. The additional drop in utility especially results from an autonomy and promotion opportunities penalty. The contribution of the job security penalty is rather small. Only about 25% of the total utility difference between workers with 1 year of overeducation and adequately educated workers in similar jobs is compensated. This compensation mainly results from a promotion opportunity premium. Also here, job security plays a minor role. Table 5 here 15

16 B. Differences between men and women Estimations on the basis of the overall sample may mask differences between alternative groups of workers. Table 6 reports separate figures for men and women. Shadow prices and costs are substantially higher for men than for women. Several studies (see, e.g., Clark, 1997; Verhofstadt and Omey, 2002) noted, after controlling for a large number of job characteristics, that women are more satisfied with their job than men. These outcomes may reflect lower labour market opportunities for women, e.g. due to statistical discrimination, which lead to lower aspirations (Clark, 1997). Similarly, the lower shadow prices and costs of overeducation for women may point towards lower chances of finding a job with appropriate requirements. Based on the same cohorts of Flemish school leavers, Verhaest and Omey (2004b) indeed found that women have a higher probability of becoming overeducated than men. Table 6 here C. Some robustness tests We recomputed the shadow prices and costs for the overall sample using some alternative model specifications. Table 6 reports the equivalent % wage changes. On the basis of the absolute wage level (WAGE), shadow prices and costs are substantially larger than those on the basis of LNWAGE. However, the WAGE model is rejected against the LNWAGE model on the basis of encompassing tests 3. Those on the basis of comparison wage (COMPWAGE) do not differ much from our basic figures. Another estimation uses only point observations of wages. Somewhat 3 Inclusion of LNWAGE in the WAGE job satisfaction model significantly (p < 0.05) improved the model (LR Chi² = 4.7). Inclusion of WAGE in the LNWAGE job satisfaction model did not lead to a significant improvement (LR Chi² = 2.2). For a description of the encompassing test principle, see Davidson and MacKinnon (1993). 16

17 surprising, also this delivers larger figures. A last estimate is based on a subjective overeducation measure, using the objective measure as instrument. For this measure, shadow prices and costs are 4 to 12 percentages points higher than those on the basis of the objective measure. This outcome is both consistent with the view that measurement error underestimates the true effect and with the view that job satisfaction depends on the individual perception of being overeducated instead of objective overeducation. Thus, we do not have indications that the substantial shadow prices and costs in the basic analysis are overestimations. Table 7 here VI. Discussion This study has examined, for a sample of Flemish school leavers, the relation between overeducation and job satisfaction by applying a shadow price approach. We differentiated between a direct psychological impact and an indirect impact via compensation i.e. earnings, autonomy, promotion opportunities and job security. Overeducated workers have a lower compensation level than adequately educated workers with similar years of attained education, but a higher compensation level than adequately educated workers with similar years of required education. Our basic results reveal that a net wage increase of 29% is needed to compensate the psychological costs of one year of overeducation, i.e. the net shadow price of overeducation. To pay off the total costs of overeducation, even a wage increase of about 39% is needed, i.e. the brut shadow price of overeducation. To compensate the lower utility level of workers with one year of overeducation in comparison with adequately educated workers in similar jobs, a wage increase of 36% is required, i.e. the net shadow cost of overeducation. After subtracting actual compensation, the wage increase at rest is 26%, i.e. the brut shadow cost of overeducation. Separate analyses by gender delivered even higher figures for men. The shadow prices and costs among women are somewhat lower but still substantial. 17

18 These results illustrate that overeducation is largely involuntary. Apart from substantial direct psychological costs, overeducated workers also have to bear lower earnings, autonomy, promotion opportunities and job security. Thus, the supposition of Sicherman and Galor (1990) that overeducation is an investment in promotion opportunities is clearly refuted. The outcomes suggest that overeducation mainly results from inefficient working labour markets. The lack of suitable offers urges job seekers to accept jobs below their educational level to escape from unemployment. The psychological costs of unemployment are found to be enormous: Clark and Oswald (2002) computed a monthly shadow price of unemployment of for British individuals. So, the decision to change the unemployment status for an overeducation status leads to a substantial increase of the utility level. Our results are also consistent with the view that overeducation has negative productivity consequences. Although overeducated workers have a higher compensation level than adequately educated colleagues in similar jobs, this only partly pays off the utility difference between these two types of workers. The higher compensation level only compensates lower satisfaction with particular job items such as wages, learning opportunities and opportunities to take initiative. These outcomes raise the question why employers hire overeducated workers. Firstly, expected direct productivity effects and lower training costs may largely compensate the indirect impact through lower job satisfaction (see, e.g., Athey and Hautaluoma, 1994). Secondly, the expected quit rate may be rather low if overeducation indeed results from a structural lack of suitable jobs. Thirdly, the satisfaction difference between the two types of workers may decrease over time. To assess this last hypothesis, additional longitudinal research is needed. This might also shed more light on possible overeducation persistence. 18

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23 Table 1: Overeducation compensators: marginal effects LNWAGE $ AUTONOMY # PROMOPP # JOBSECURITY # YREQ/YEDUC.035 **.035 **.041 **.017 ** Reference=YEDUC YOVER ** ** ** * YUNDER.025 **.023 **.028 **.017 ** Reference=YREQ YOVER.021 **.014 **.020 **.011 ** YUNDER ** LR Chi² (32) ** 657.4** 356.7** 249.4** Also included but not reported: dummies for gender (1 dummy), non-european descent (1), firm size (4), industry (12), professions (3), shift-work (1), night-work (1), temporary (1) and part-time contract (1). $: Applied model: interval estimation; Reported: coefficients #: Applied model: binary probit; Reported: marginal change in probability at sample mean values. *: p <.05, **: p <.01; N =

24 Table 2: Satisfaction with different job items: ordered probit coefficients Satisfaction with... Wage Job security Holiday Arr. Job content Direct chef Colleagues Promotion Opp. Physical conditions Work pressure Working hours Arr. Learning Opp. Opp. take Initiative YREQ/YEDUC.028 **.058 ** **.046 **.038 **.103 **.081 **.023 * **.118 ** Ref.=YEDUC YOVER ** * ** ** ** ** ** YUNDER.051 *.047 * * ** *.085 ** Ref.=YREQ YOVER ** **.032 * ** * YUNDER ** * LR Chi² (32) 402.3** 757.6** 417.8** 614.3** 153.2** 96.0** 365.1** 593.7** 174.8** 393.3** 625.1** 843.8** YREQ/YEDUC **.025 ** **.054 ** **.065 ** Ref.=YEDUC YOVER ** ** **.024 * ** ** YUNDER ** * Ref.=YREQ YOVER **.028 * * ** * ** YUNDER.046 * * * LNWAGE **.210 *.319 **.276 **.279 **.330 **.512 **.273 **.265 **.215 *.299 **.340 ** AUTONOMY.098 *.188 **.237 **.438 **.382 **.225 **.284 **.310 **.472 **.352 **.428 **.695 ** PROMOPP.273 **.526 **.226 **.456 **.343 **.196 ** **.202 **.139 **.562 **.560 ** JOBSECURITY.152 * **.197 **.255 ** ** * **.316 ** LR Chi² (36) 763.1** 959.0** 553.6** 889.9** 355.2** 164.3** 666.3** 683.5** 344.7** 471.5** 962.4** ** N Also included but not reported: dummies for gender (1 dummy), non-european descent (1), firm size (4), industry (12), professions (3), shift-work (1), night-work (1), temporary (1) and part-time contract (1). *: p <.05, **: p <.01; N =

25 Table 3: Overall job satisfaction: ordered probit coefficients (1) (2) (3) (4) (5) (6) YREQ/YEDUC.031 ** * Ref.=YEDUC YOVER ** ** ** ** ** ** YUNDER Ref.=YREQ YOVER ** ** ** ** ** ** YUNDER LNWAGE ** ** AUTONOMY ** ** PROMOPP ** ** JOBSECURITY **.272 ** Compens. Chi² (1/4) ** 96.6** 164.2** 62.7** 285.1** Model Chi² (32) 400.4** 422.1** 497.7** 564.8** 463.0** 687.9** Also included but not reported: dummies for gender (1 dummy), non-european descent (1), firm size (4), industry (12), professions (3), shift-work (1), night-work (1), temporary (1) and part-time contract (1). *: p <.05, **: p <.01; N =

26 Table 4: Shadow prices and costs of overeducation: basic calculations NSPOV BSPOV NSCOV BSCOV LNWAGE shadow prices and costs % wage increase 29.0% 38.9% 35.8% 25.7% Hourly wage increase (EURO) Full-time monthly wage increase (EURO) Derived from basic job satisfaction estimations (table 3, estimation (6)); Marginal effects on compensation based on estimations in table 1; Monthly and hourly wages based on sample mean LNWAGE = 1.797, equivalent hourly wage = 6.03, equivalent full-time monthly wage = 993 (based on 38 working hours/week). 26

27 Table 5: Shadow prices and costs of overeducation: decomposition BSPOV=100% NSCOV=100% NSPOV 77.4% BSCOV 74.7% Wage penalty 4.3% Wage premium 6.8% Autonomy penalty 8.4% Autonomy premium 6.2% Promotion opportunity penalty 8.6% Promotion opportunity premium 9.2% Job security penalty 1.3% Job security premium 3.1% Derived from basic job satisfaction estimations (table 3, estimation (6)). Marginal effects on compensation based on estimations in table 1. 27

28 Table 6: Shadow prices and costs of overeducation: differences between men and women N NSPOV BSPOV NSCOV BSCOV Men % 55.0% 49.8% 35.1% Women % 34.9% 33.1% 24.8% Derived from separate satisfaction and compensation estimations for men and women. Estimation results are not reported, but are available upon request. 28

29 Table 7: Shadow prices and costs of overeducation: robustness tests Overeducation measure Wage measure Interval observ. excluded? N NSPOV BSPOV NSCOV BSCOV JA WAGE NO % 44.1% 40.5% 30.8% JA COMPWAGE NO % 40.5% 33.5% 24.5% JA LNWAGE YES % 55.2% 45.3% 32.9% RL (IV) LNWAGE NO % 51.1% 41.7% 29.6% Based on sample mean LNWAGE = 1.797; Equivalent hourly wage = 6.03 ; Marginal effects on compensation based on estimations in table 1 for JA measure and equivalent estimations for RL (IV) measure. 29