The Dynamics of Educational Attainment, Overeducation, and Wages

When individuals enter jobs requiring a lower level of education, their returns to education may be lower. Existing studies analyze this by estimating wage penalties conditional on job match. This paper goes further by introducing a new decomposition that expresses returns using a potential outcome framework, taking into account both overeducation probabilities in the first job and the subsequent associated penalties. We embed this framework in a dynamic model of endogenous educational choices, overeducation, and wages, controlling for unobserved heterogeneity. Using Belgian data, we find that overeducated workers experience a persistent wage penalty. Yet, because the risk of overeducation is also present at intermediate education levels, its impact on average returns is often limited and can even be positive in the case of Bachelor's degree. Finally, we show that overeducation is a major source of heterogeneity in realized returns among Master's graduates.