Wage effect of over-education and mismatch in Malaysia: A random effect approach

Abstract

This paper explores the effect of education mismatch and earnings outcome in Malaysia by taking both over-education and mismatch by field of study into account. Based on 2007 Malaysia Productivity Investment Climate Survey (PICS), it is found that around 18% and 28% of workers employed in jobs for which they are over and under-educated, respectively. In terms of mismatch, about 52% of workers are employed in jobs not corresponding to their field of study (17% does not related and 35% no specific field of study required). Close examination reveals that nearly two-third of the overeducated are employed in jobs outside their own field of study. With respect to earnings outcomes, Random Effect (RE) models show that being overeducated and employed outside own field of study resulted in earnings loss, between 5 and 8% for the former and 6 and 10% for the latter. Moreover, the wage penalty for being overeducated increases to roughly 14% to 17% if working in jobs unrelated to their field of study. Greater earning loss may suggest that among the overeducated, they are heterogeneous of both schooling and workers. As such, the results imply that there are significant costs to selecting a major and then deciding to work in an occupation unrelated to the major since knowledge and skills acquired is not completely general and cannot simply be transferred to other occupations.