Does over-education raise productivity and wages equally? The moderating role of workers’ origin and immigrants’ background

Abstract

We provide first evidence of the impact of over-education, among natives and immigrants, on firm-level productivity and wages. We use Belgian linked panel data and rely on the methodology from Hellerstein et al. (1999) to estimate ORU (over-, required, and under-education) equations aggregated at the firm level. Our results show that the over-education wage premium is higher for natives than for immigrants. However, since the differential in productivity gains associated with over-education between natives and immigrants outweighs the corresponding wage premium differential, we conclude -based on OLS and dynamic GMM-SYS estimates -that over-educated native workers are in fact underpaid to a greater extent than their over-educated immigrant counterparts. This conclusion is refined by sensitivity analyses, when testing the role of immigrants' background (e.g. region of birth, immigrant generation, age at arrival in the host country, tenure).

Labour Market Disadvantages of Citizens with a Migration Background in Belgium: A Systematic Review

“…First-generation migrants from developing countries tend to be overeducated and face a higher wage penalty for overeducation conditional on attained education than people born in Belgium and other developed countries (Jacobs et al, 2021(Jacobs et al, , 2022b. Although there is a positive wage premium for an additional year of overeducation conditional on the required level of education for a job, this premium is smaller for people with a migration background compared to native workers (Jacobs et al, 2022a). Furthermore, Fays et al (2023) demonstrate that economic rents are distributed unfairly based on workers' birth regions.…”

“…Irrespective of origin country and generation, the impact of overeducation on productivity is found to be greater than that on wages. The estimates of Jacobs et al (2022a) suggest that overeducation generates a positive gap between productivity and wages, which implies that, given their productivity, overeducated workers are underpaid compared to their well-matched colleagues. Finally, their estimates show that the productivity-wage gap (i.e.…”

“…Furthermore, among the 22 studies focusing on first-generation migrants, differences in human capital are highlighted as a theoretical mechanism explaining employment disparities in 5 studies (23%), while 6 studies (27%) find evidence for this mechanism. These disparities encompass four key aspects: (i) educational attainment disparities between native-born individuals and migrants, with migrants having lower levels of education on average (Piton & Rycx, 2021); (ii) the imperfect transferability of human capital, for example, when degrees obtained in developing countries are perceived as of lower quality or less valuable in the destination country, or when degrees obtained abroad are not recognised in the host country (Fays et al, 2023;Jacobs et al, 2022aJacobs et al, , 2022bPiton & Rycx, 2021;F. Verhaeghe et al, 2017); (iii) skill mismatches, such as a higher likelihood of overeducation among tertiary-educated workers from developing countries (Jacobs et al, 2022b); and (iv) language barriers, as proficiency in the destination country's language enhances the economic returns on work experience gained in the country of origin (Kanas & van Tubergen, 2014;Piton & Rycx, 2021).…”

“…Moreover, policy recommendations are proposed at the institutional level. Given the rigidity characterising the Belgian labour market, which results in disparities between labour costs and productivity that may disadvantage employees (Garnero et al, 2020;Kampelmann et al, 2018), more adaptable labour market policies may be advantageous (Jacobs et al, 2022a). Besides introducing flexible labour market policies, competition regulation may positively impact wage discrimination, as Fays et al (2021) observe that wage discrimination diminishes or disappears as product market competition increases.…”