College Majors and Skill Mismatch in Labour Markets : A General Equilibrium Approach

This paper studies the aggregate and distributional consequences of college major-occupation mismatch. While most existing research focuses on in dividual-level wage losses in partial equilibrium, we develop a general-equilibrium framework to quantify the aggregate inefficiencies. We define mismatch as the deviation from the optimal allocation of college majors to occupations, given observed wage returns, and estimate these returns using a Roy model applied to unique Australian administrative tax panel data linking university degrees to the longitudinal earnings and employment histories. Consistent with prior work, we find that mismatch leads to substantial individual wage losses-up to 28 percent in a partial equilibrium. However, the corresponding general-equilibrium output losses are more limited, peaking at 10 percent. Importantly, mismatch declines over the life cycle and largely vanishes by age 35 in a general equilibrium. The findings underscore how micro-level misallocation in human capital may not always aggregate to output inefficiencies.