Working paper No. 291: The Impact of Employing Mismatched Workers on Firm Productivity, Wages and Profits

Abstract

Educational mismatch in the form of over- and under-educated workers has long been studied in relation to labor market outcomes for individual workers. While its consequences for individual workers and society are dire, we have only anecdotal evidence of its consequences for firms’ competitiveness. To bridge this gap, this paper studies the impact of mismatch on firm productivity, wages and profit. The results suggest an asymmetric effect from employing over- and under-educated workers. We find that while employing over-educated workers add to wage cost, there are no matching productivity gains, By contrast, the performance of under-educated workers more than compensates for their wage costs, leading to increased profits at the firm level. The net effect, therefore, in the form of gross operating surplus is significantly negative (positive) when firms employ over- (under-)educated workers. The results suggest that the positive effects primarily stem from under-educated young workers, whereas the losses can be traced to over-educated older workers.