Determinants and Wage Penalty of Skills Mismatch: Cross-Country Evidence from ETF Partner Countries

The current literature finds that many employees in low and middle-income countries are over-qualified for their jobs or are employed in an occupation that is unrelated to their principal field of study. Vertical and horizontal mismatches signal that workers cannot fully utilise their skills, implying a potential loss of human capital. However, the current literature scarcely explores the determinants and wage penalties of horizontal and vertical skills mismatches comparably across countries, as well as their co-occurrence. We analyse the determinants of vertical and horizontal skills mismatch between 2016 and 2019 using the Labour Force Survey (LFS) of Serbia, Albania, Türkiye, Georgia, Armenia, Egypt, and Palestine. Consistent with the existing literature, the findings show that socio-demographic, job-related, and geographic characteristics determine vertical and horizontal mismatches, as well as their combined occurrence. The results also show that overeducation imposes a wage penalty, that horizontal mismatch is associated with a wage premium of approximately 7.5%, and that the combination of overeducation and horizontal mismatch yields a small positive net effect of approximately 1%.