By Michela Vecchi
The skill mismatch among graduates identifies graduates whose skills are higher than required in their job or, more simply, graduates not employed in a graduate occupation. The extent of the phenomenon is large. In a recent study carried out for the ONS, my co-authors and I estimated the proportion of graduates who are not employed in graduate jobs at just above 30%. The presence of the skill mismatch generates a series of concerns as it indicates an inefficient use of resources and it is associated with lower productivity. Mismatch graduates suffer a wage penalty as their wages are lower compared to graduates who find a perfect job match. In addition, it is far from being a temporary phenomenon and graduates starting in a non-graduate occupation tend to remain mismatched for a long period of time.
Our new ESCoE Discussion Paper presents new estimates of the mismatch in the UK and its impact on graduates’ earning, addressing a series of well-known issues in the related literature. First, we deal with the measurement of skills. A common method of estimating the mismatch relies on information on education to evaluate both the average level of skills within occupation (the benchmark) and the skills supplied by graduate workers (realised matches method). A main limitation of this approach is that it does not account for graduates’ heterogeneity and for skills beyond education. The first contribution of our study is to extend this measure using information on the skill content of occupations, provided by the ONS (2010). The skill content is identified not only by the level of education but also by the length of time deemed necessary for a person to become fully competent in the performance of the tasks associated with a job. Under the assumption that the skill content of the occupation reveals the skills of workers, we map all graduates in this classification and we are able to distinguish between high-skilled and low-skilled graduates, both matched and unmatched. As shown in Figure 1, low skilled overqualified graduates account for 24.4% of the total skill mismatch (31.2%). The remaining 6.8% are high-skill overqualified. This group is less of a concern as, although overqualified, they are employed in occupations where their skills are likely to be valued. For example, some high-level managerial occupations may not require a degree but having one may facilitate entry and future progression.
The next issue we address is to what extent the university background contributes to the skill mismatch. Authors have argued that the expansion of the university sector has generated degrees of low value, but the evidence on this point is not very strong. Our analysis looks at the university background considering selection criteria in UK institutions and also by distinguishing between degrees awarded in the UK and those awarded by foreign universities. Our assumption is that graduates with a foreign degree are more likely to face market frictions that prevent a good job match, compared to UK graduates. For example, they may have language difficulties or less knowledge of labour market opportunities in the UK. Low reservation wages could also lead to graduates accepting a job that does not require a degree. Since 2012, the APS reports information on the university of study and this allows us to discriminate between workers with a UK degree from those with a foreign degree, while also accounting for their nationality. This distinction is important not only to get a better understanding of the skill mismatch but also to design the best policy to reduce it. In the extreme case where all the overqualified graduates studied in foreign institutions, a policy aimed at reforming the UK university system would be misguided.
Figure 2 shows that 40% of the skill mismatch in the UK is accounted for by graduates with foreign degrees. Although there is still a fairly large proportion of mismatched UK graduates with low-level skills (14.4%), a sizeable proportion of the total mismatch is not related to the UK university system.
Skill heterogeneity and academic background among overqualified graduates also matter in wage determination. Our results show that the wage penalty for overqualification is significantly larger for low-skilled overqualified graduates (39%) compared to those with higher skill levels (20%). We also estimate a further wage penalty for those who studied in a foreign institution, independent of their nationality.
From a policy perspective, recommendations discussed in the 2019 Augar review include increasing support for the provision of STEM education to boost the provision of key skills, to increase productivity and to reduce the problem of skills mismatch in the UK. The Government response to the review has led to budget cuts to the arts and creative subjects in higher education, starting in October 2021. Our results show that having a STEM degree is positively correlated with the probability of finding a graduate job, but it has a small and often non-statistically significant effect on wages. STEM subjects are certainly important, but one must bear in mind that the fourth industrial revolution will most likely increase the demand for a large variety of skills, including artistic and creative skills, that are less likely to be replaced by Artificial Intelligence (AI). Improving our understanding of the relationship between technology, and the skill mismatch is an important development for future research.
The COVID-19 pandemic raises new concerns regarding job opportunities for graduates. Entering the labour market during recessions can have long-term negative consequences for career prospects, earnings and health. However, these effects are lower for those with higher education levels. The COVID-19 crisis is having unprecedented negative effects on the global economy and it is difficult to predict long-term consequences for graduates. However, investing in education and developing a wide range of skills might help graduates to better adapt to future job market conditions.
Read the full ESCoE Discussion Paper here.
Michela Vecchi is an Associate Professor in Economics at Middlesex University
ESCoE blogs are published to further debate. Any views expressed are solely those of the author(s) and so cannot be taken to represent those of the ESCoE, its partner institutions or the Office for National Statistics.