Vertical skill mismatch and wage consequences in low‐skilled jobs: Evidence from Iran

Published date01 March 2017
Date01 March 2017
DOIhttp://doi.org/10.1111/ilr.12000
International Labour Review, Vol. 156 (2017), No. 1
Copyright © The authors 2017
Journal compilation © International Labour Organization 2017
Vertical skill mismatch
and wage consequences
in low-skilled jobs: Evidence from Iran
GholamReza Keshavarz HADDAD* and Nader HABIBI**
Abstract. Using microdata from Iran’s Household Income and Expenditure
Survey, the authors investigate the incidence of over-education over the period
2001 –12 and show that the ratio of workers with post-secondary education in-
creased steadily in many low-skilled jobs that required lower educational attain-
ment. Their econometric analysis shows that the odds of over-education were
higher for women than for men and that the likelihood of over-education also had
a strong negative association with a worker’s experience. Additional econometric
tests reveal that over-education had a negative impact on workers’ wages in the
private sector but that the opposite was true for public sector jobs.
The rate of unemployment among university graduates in the Islamic
Republic of Iran (hereinafter “Iran”) has increased sharply in recent
years, rising from 16.5 to 20.9 per cent between 200 8 and 2012.
1
Labour market
surveys have revealed that high unemployment rates are found not only among
graduates in the humanities and social sciences, but also among those with en-
gineering and science degrees. This trend is mainly driven by the rapid increase
in university enrolment during the past two decades: Iran now has one of the
highest ratios of university students to total population in the Middle East.
Furthermore, high unemployment rates among graduates have led to a
sharp increase in demand for post-graduate degrees, and thus to rapid growth
in the supply of master’s and PhD graduates in recent years. Indeed, many
individuals who cannot nd a suitable job with their rst degree return to
university to obtain advanced degrees in order to improve their chances of
employment. Yet, there is no evidence that the economy can create productive
* MSharif University of Technology, Tehran, email: g.k.haddad@sharif.edu. ** Brandeis
University, Waltham, MA, email: nhabibi@brandeis.edu.
Responsibility for opinions expressed in signed articles rests solely with their authors, and
publication does not constitute an endorsement by the ILO.
1 The unemployment rate of college-educated women was 32 per cent and that of men
14.8 per cent in 2012 (labour survey conducted by the Statistical Centre of Iran).
International Labour Review46
jobs for all of these graduates. Labour force surveys for 2005 –12 reveal that
more than 85 per cent of labour market mobility in Iran is job-to-job, while
only 4 per cent is change in employment status from unemployed to employed.
Overall, the evidence suggests that Iran is experiencing a condition described
as over-education in the labour economics literature, one that is observed in
many developing countries.
A worker is considered over-educated if his or her level of education ex-
ceeds the required level of education for his or her current job. In economic
analysis, this phenomenon is studied in the framework of matching theory –
over-education can indeed be viewed as a “mismatch” between the skills or
education of a worker and the skills required for a specic job. Economic
studies differentiate between two types of mismatch: horizontal and vertical
mismatch.
Horizontal mismatch occurs when the education or skill of a worker is
not appropriate for her/his specic job. The issue of horizontal mismatch re-
ceived considerable attention from economists after the global economic cri-
sis of 2008 . It can be caused by technological and demographic change as well
as economic development.
Vertical mismatch occurs when a worker’s level of education or skill
is less than or more than the level required for the job. In this framework,
over-education is thus dened as a vertical mismatch. Appropriate matching
between supply and demand for skills plays an important role in economic
growth, and in the productivity and efciency of the labour market. Conse-
quently, the creation of an efcient and responsive educational system is a
major challenge in most countries. In this article, we focus on vertical mis-
match in terms of years of schooling and ignore qualication mismatch when
the level of education is suitable.
Over-educated workers earn less and experience more job dissatisfac-
tion than well-matched workers with the same level of education (Korpi and
Tåhlin, 2009; Hartog, 2000). But if this is the case, why do young jobseekers
accept jobs for which they are over-educated? One possible answer is that by
accepting a lower-skilled job, the educated worker escapes unemployment and
the associated stigma (Vishwanatch, 1989; Arulampalam, Booth and Taylor,
2000). A second explanation is that accepting a low-skilled job may serve as
a stepping stone on the way to nding a well-matched job. A young worker
in this position engages in an on-the-job search until he or she can achieve a
job-to-job transition (Wald, 2005). This explanation has been criticized for two
reasons. First, after nding a lower-skilled job, a worker might gradually lose
his or her incentive to engage in further job search (Holzer, 1991). Second, as
the worker gains experience in the low-skilled job, he or she might become
locked into the vertical mismatch (Pissarides, 1990).
An appropriate indicator of skills mismatch is one that compares the
education levels of employed and unemployed workers in the labour mar-
ket, although there is no unanimous agreement about such a measure among
labour economists. The ILO (2013) has adopted a supply-and-demand mis-

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