May 03 2019

Overeducation in the UK labour market

Dr Michela Vecchi, Associate Professor of Economics, shares results of her recent research on overeducation in the UK workforce.

A person can be overeducated if they possess more education than required for the job. A recent study I conducted for the ONS, co-authored with Maja Savic and Adama Lewis (Economic Review: April 2019), shows that although education leads to higher wages, returns are lower when workers are overeducated.

Using data from the Annual Population Survey (APS) we estimated the extent of overeducation in the UK labour market, looking at the working population aged 16 to 64, and at the impact of overeducation on wages. In 2017, 16% of workers in the UK aged between 16 and 64 were overeducated.  This proportion has changed over time as shown in Figure 1. The highest number of overeducated male workers was observed in 2007. After the financial crisis, this proportion decreased while the number of overeducated female workers increased. In the last two years, we observe the same incidence of overeducation for both men and women.

Figure1: Percentage of those in employment defined as “Overeducated” by sex, 16 to  64.

UK, 2006 to 2017

Source: Annual Population Survey, Office for National Statistics

Is overeducation a temporary phenomenon?

Overeducation could be a temporary phenomenon as individuals may start on a job which requires a lower level of education to gain some relevant work experience. If this is the case, we should observe overeducation to decline with age. However, the existing empirical evidence is quite mixed. To answer our question, we computed the rate of overeducation for different age groups. Our results show that workers aged 25 to 34 years and 35 to 49 years experience the highest rate of overeducation, and the proportion of overeducated workers in the age group 35 to 49 years has increased since 2013. The finding of higher overeducation in those aged 25 to 34 is consistent with the presence of short-term labour market frictions. However, the high level of overeducation for workers aged 35 to 49 years of age indicates a more persistent phenomenon.

Overeducation in London and the rest of the country

Figure 2 shows that overeducation tends to vary across different regions. In 2017, London had the highest proportion of overeducated workers in the UK. This phenomenon is likely to be driven by the composition of the labour force, characterised by a relatively high proportion of immigrants who are typically overeducated. Many foreign nationals working in the UK come to the country to improve their English, hence they may be willing to take a lower-skilled job. Our data show that on average, non-UK born workers tend to be more overeducated compared with the UK-born. This also implies that companies operating in the London area benefit from having access to a large pool of skilled labour, which can be crucial for their performance.

Figure 2 Percentage of those in employment defined as “Overeducated” by region and country, 16 to 64 years, UK, 2017

Source: Annual Population Survey, Office for National Statistics

Graduate overeducation

Being a graduate increases the likelihood of being overeducated. In 2017, the average overeducation rate for graduates with first degree or equivalent qualification was 30.9% and reached a peak of 50% for recent graduates with Arts degrees. This may look alarming; however, when we assess the impact of overeducation on the wage level, we find that recent graduates have a lower wage penalty compared to non-recent graduates. This suggests that recent graduates have specific skills or unobservable characteristics that are better valued in the labour market compared with non-recent graduates.   Our data does not contain information on individuals’ cognitive and non-cognitive skills (personality traits), but related studies show that these factors are very important for a successful labour market experience (Heckman et al. 2006). The relatively better performance of recent graduates may also indicate that the university sector is becoming better equipped at providing valuable skills. As discussed in Chevalier and Lindley (2009) the fast expansion of the higher education in the UK since the 1980s might have initially compromised quality for quantity. But, over time, universities have been able to adjust to the large influx of graduates.

In this study we have focused exclusively on wages but there are other job characteristics that workers value, such as flexible hours, desirable location and job security. A graduate might accept a lower paid job in exchange for some of these features, in which case there is not a real ‘penalty’ for overeducation.  Related evidence also shows that an increase in education leads to improved social trust, volunteering and political efficacy (Green and Henseke 2016), indicating that the benefits of education go beyond wages and individuals’ preferences and it can increase welfare in our society. A discussion on our work in the Guardian claims that education is for life not just for employment prospects, and that individuals will need to be increasingly adaptable to the challenging conditions of the labour market. Having spent most of my life in education, I certainly agree with these views.

The views expressed in this blog are those of the author and not those of the ONS.

A BBC coverage of this work can be found at: https://www.bbc.co.uk/news/business-48091971

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