The utilisation of human capital from education in Australian labour markets: over-education?

Abstract

Modern societies devote considerable resources to the education of individuals. This represents an investment for individuals and societies. Since many of the benefits are realised via the employment of individuals, labour markets are critical for the accrual of benefits to such investments in education. Labour market failures, therefore, can adversely affect the benefits that accrue to individuals and societies. In particular, their failure to facilitate the full utilisation of the human capital individuals derive from education—a phenomenon referred to as over-education—would diminish such benefits. For societies, over-education implies an under-utilisation of human capital available in the workforce, leading to productivity levels, economic growth rates and living standards below their potential. Meanwhile, over-educated individuals would not receive the full benefits to their investments, at least in terms of increased earnings. This study aims to investigate the existence of over-education in Australian labour markets. It uses individual-level data from the Household, Income and Labour Dynamics in Australia (HILDA) Survey for the 2001 to 2008 period, where initial results indicate roughly 20 per cent of working-age employees are over-educated in each year.

The study considers three key questions regarding over-education. The first concerns its identification and subsequent assertion that individuals deemed over-educated have human capital from education that is under-utilised in their current job. This pivotal assertion is empirically tested. The results indicate those identified as over-educated do indeed have under-utilised human capital. The second question concerns the dynamics of over-education. In particular, the possibility that over-education is a result of the inherently dynamic nature of labour markets, whereby it may be merely short-term disequilibria with no enduring effects. While it is predominantly a temporary state, a significant proportion of affected individuals are found to be persistently over-educated. It is also found to have detrimental effects that endure beyond individuals’ exits from the state; specifically, evidence indicates over-education can lead to human capital depreciation. Over-education, therefore, is not merely a by-product of adjustment processes in dynamic and well-functioning labour markets. The third question concerns the possibility not all over-education represents labour market failures. In particular, since many job attributes, not just the wage, can affect individuals’ utility levels, some over-educated individuals may have obtained jobs that maximise their (expected) utility levels and, therefore, achieved their preferred outcome. Thus, individuals may trade wages for non-pecuniary benefits or improved working conditions and, thereby, accept jobs for which they are over-educated. The results indicate roughly one-third of over-educated individuals are actually voluntarily over-educated. They are found to trade wages for increased job security, preferred hours, greater job flexibility and reduced stress. And, overall, they are more satisfied with their achieved work-life balance.