Why the youth are so eager for university education? Evidence from Iran’s labor market

Purpose - The purpose of this paper is to estimate the wage difference between overeducated and adequately educated workers in a sample of semi-skilled and low-skill occupations in Iran’s labor market. The objective is to see if overeducated employees in these occupations enjoy higher wages in comparison to their adequately educated co-workers. Design/methodology/approach - The authors use the propensity score matching (PSM) model to estimate the wage difference between overeducated and adequately educated workers in a sample of semi-skilled and low-skill occupations in Iran’s labor market. The PSM method allows the authors to prevent selection bias by comparing each group of overeducated workers with a matched group of adequately educated workers with similar socio-economic characteristics. Findings - The results show that in Iran’s labor market, the overeducated workers enjoy a wage premium in the range of 10-25 percent for their excess education when they have to work in semi- or low-skill occupations. While this relative advantage has gradually declined for private sector employees over the period 2001-2013, it has remained stable for public sector jobs. The result is attributable to the fact that salary and benefits for public sector employees are directly linked to education attainment and their work experience. The findings show that the relative wage advantage of overeducation is larger for the younger employees with ten or fewer years of experience who have more education than older workers. Overall these findings offer an explanation for the strong desire of Iranian youth for university education. If a university graduate finds a job that matches her/his specialization she/he will enjoy a higher salary than a high school graduate. If she/he has to accept a semi-skilled or low-skill job for which she/he is overeducated, she/he still enjoys a wage premium over her/his co-workers who are not overeducated. Originality/value - The analysis makes three unique contributions: first, the authors use a unique and detailed micro-data for an economy (Iran) in which the public sector dominates the private sector. The authors investigate the hypothesis for private and public sectors separately. Second, the authors divide the sample of workers into market newcomers and experienced workers. The authors analyze the impact of overeducations on each group separately. Third, the authors use the treatment effect of being overeducated on the individual’s monthly wage by the PSM. The advantage of the PSM method is that it eliminates the selection bias in the wage effect of overeducation, whereas the traditional regression-based techniques may result in this type of bias.