Educational mismatch and earnings inequality

Tang, Rongsheng and Wang, Gaowang (2021): Educational mismatch and earnings inequality. Forthcoming in: Economic Modelling

Abstract

We build a model to understand educational mismatch and earnings inequality among highly educated workers. Educational mismatch has a negative wage effect and a positive correlation with wage inequality, for occupuations and college majors. To disentangle different reasons or channels that contribute to wage inequality, we identity the three underlying reasons behind the mismatich-preference, promotion, and search friction-and quantify their impacts. Quantitatively, the preference and promotion channel negatively contribute to an inequality increase from 1990 to 2000; the match premium contributes to a 28.4% increase in inequality; and the contribution of search friction is 5.3%. We conclude that educational mismatch affects earnings inequality significantly and that the impact varies based on the underlying reasons. The study has important policy implications in that it shows that wage inequality can be reduced by policies for improving the education match rate and educational signaling and lowering market friction.

• Item Type: MPRA Paper
• Language: English
• Keywords: educational mismatch; earnings inequality; wage effect; search friction; promotion
• Subjects: I - Health, Education, and Welfare > I2 - Education and Research Institutions > I24 - Education and Inequality; J - Labor and Demographic Economics > J2 - Demand and Supply of Labor > J24 - Human Capital ; Skills ; Occupational Choice ; Labor Productivity; J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J31 - Wage Level and Structure ; Wage Differentials; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O15 - Human Resources ; Human Development ; Income Distribution ; Migration

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