countries. On average, the increase in income due to education, while positive, is much less than would be predicted given the number of years of schooling.<sup>14</sup> Most developing countries suffer from high rates of mismatch between the level of education required for a job, and the education of the people actually doing it: the well-known anecdote of unemployed engineers driving taxis.<sup>15</sup> In the literature, this is often referred to as “over-education”, though a better description is “underutilization” as it is the lack of jobs and not the level of education that is cause of the mismatch. In some regions, especially the Middle East and North Africa, underutilization is associated with selfemployment, for example while queuing for a formal sector job.<sup>16</sup> To address this, the full UHCI introduces a concept of _better employment,_ which is designed to capture the employment categories where people can better use their human capital (subject to available data). More specifically, _better employment_ is defined as non-agricultural employees, plus employers. This definition is not intended as a value judgment, but rather is based on the type of jobs that are relatively rare in low-income countries, but are common in high-income countries—suggesting they are associated with higher productivity. The share of employment in better jobs increases from about 20 percent in low-income countries to 80 percent in high-income countries (Merotto et al. 2018, Figure 0.8). The main categories excluded from the definition are subsistence ownaccount/family agriculture, small-scale traders, and landless agricultural laborers, as these employment types are only common in low-income countries—suggesting they are more likely to have lower productivity.<sup>17</sup> By using a narrower definition, better employment also reduces variation in employment rates across low-income countries (variation in basic utilization is are often caused by variation in the employment definition used).

The definition of better employment is based on the way that the work is organized, rather whether the job is formal or informal. For example, non-agricultural employees could be formal or informal.<sup>18</sup> Better employment involves work organized in a team consisting of at least an employer and employee, where employees are paid for their work (rather than out of familial obligation). This allows a minimum degree of specialization and organization, which helps to boost productivity and for people to use their skills.<sup>19</sup> A second conceptual issue with the basic measure is that utilization should be _relative to potential_ , which will depend on how much human capital there is to underutilize. That is, a doctor working as an agricultural laborer results in severely underutilized human capital, whereas the human capital of a worker with no education doing the same job is closer to being fully utilized. This means the utilization scores of countries with higher levels of human capital should be more heavily penalized by a lack of better employment.

The final, and more technical, conceptual issue that some of the income gains in Equation 10 are from utilizing people’s time, rather than utilizing their human capital: even in a country with no human capital in both status quo and alternative worlds (h=1, raw labor), an increase in basic utilization will still increase output.

14 On average, those with a complete secondary education were only earning 60 percent more than those with no education, which is the equivalent of fewer than 6 years with an 8 percent return to education. Omitted variables such as parental income and ability mean that the 6 years is likely an overstatement.

15 See Battu and Bender (2020) for a survey. Another cause of the mismatch can be poor education quality, where those with a qualification are not able to perform the functions required. In this case, the cause of the engineer driving a taxi is because of he or she is not able perform the tasks of an engineer due to poor quality education.

Handel et al (2016) find that in 12 low- and middle-income countries, the overeducation/underutilization rate is 36 percent. Overeducation/underutilization rates vary across countries and can depend on how it is measured.

16 See Handel et al (2016) and Gatti et al (2013).

17 The categories here are based on "International Classification by Status in Employment, 1993 (ICSE-93)”, and also exclude workers not classifiable by status.

18 The definition of formal employment varies across countries, but generally refers to the coverage of the worker with respect to benefits like unemployment insurance, pensions, and sick or annual leave.

19 Better employment is different from “decent work” (ILO) and “Good jobs for development” (WDR 2013).

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