Over-Education, Under-Education and Credentialism in the Australian Labour Market. NCVER Monograph Series 10/2012
Author: Dockery, Alfred Michael
Date: 2012-00-00
Type: Reports - Research
Subjects: Educational Attainment,Foreign Countries,Wages,Least Squares Statistics,Labor Market,Salary Wage Differentials,Outcomes of Education,Work Experience,Education Work Relationship,Employees,Employers,Credentials,Human Capital,Comparative Analysis

It is well established that workers with more years of education earn higher wages. By establishing a reference or &quot;required&quot; level of education for a worker's occupation, it is possible to decompose an individual's actual level of education into years of required education and years of over-education or under-education relative to that occupational norm. A richer picture of wage determination can be gained by substituting these three terms for actual education in the standard Mincer wage equation. Relative to the standard estimates of returns from years of actual education, international and Australian studies using this &quot;ORU model&quot; (&quot;over&quot;-education, &quot;required&quot; education, &quot;under&quot;-education) typically find larger returns from years of required education and modest returns from years of over-education. Workers benefit from being employed in an occupation for which they are under-educated, because the positive effect of being in an occupation with a higher reference level of education outweighs the negative effect of their years of under-education. This report shows how the ORU model can be used to inform consideration of the wage implications of credentialism, defined as an increase over time in the education standards for specific jobs and which is not necessary for the effective achievement of tasks across positions in the labour market. Data from the 2006 Census of Population and Housing are used to establish the required (mean) level of education in each of 46 two-digit occupations for a sample of employees from waves 1 to 8 of the Household, Income and Labour Dynamics in Australia (HILDA) Survey. Both standard ordinary least squares (OLS) and panel data models show that the estimated return from years of required education exceeds the return from years of surplus education. This result is robust to the augmentation of the ORU model with variables for the occupation of employment, and to estimation on separate samples of males and females. The years of educational attainment attributable to credentialism are associated with an increase in the hourly wage of the same order of magnitude as the years of over-education in the standard ORU model. Under extreme versions of credentialism, where the level of education is used only to match individuals to jobs and where the skills that are valued in the labour market are only learned on the job, it would be expected that the credentialism wage effect would be zero. The fact that this return is not zero indicates that, even if the higher levels of schooling of our younger cohorts are not needed for them to be assigned to jobs, the skills learned at school are valued in the labour market. There are two key policy messages from this research. The first is that the additional years of schooling associated with credentialism are not wasted: these additional years appear to be linked to the development of skills that attract a reward of around 3-6%. This is comforting for advocates of the expansion of the education sector. Second, there are large gains that could be potentially achieved through a better matching of workers' actual educational attainment to job requirements. (Contains 14 tables, 1 figure, and 11 footnotes.)