Skill mismatch and overeducation in transition economies

The employers’ perspective on skill mismatch

According to surveys of firms conducted before the Great Recession of 2008/2009, employers regarded an inadequately educated workforce as a binding constraint to business growth [7]. The latest round of the Business Environment and Enterprise Performance Survey conducted in 2013/2014 finds a decline in the number of transition economies in which employers identified workforce skills as among the top three obstacles, from 11 of 29 countries in the 2008/2009 round to five countries (the Baltic countries, Belarus, and Moldova) [8]. But this drop is due less to an improvement in education and training than to the impacts of the global financial crisis, which affected the availability of skilled workers and made other obstacles relatively more important.

Recent ad hoc skills surveys of firms in Armenia, Georgia, Macedonia, and Ukraine conducted as part of the World Bank’s Skills toward Employment and Productivity project in 2013–2015 support this argument. An overwhelming majority of surveyed firms reported that high taxes and social security contributions as well as poor business conditions in general posed much greater constraints to firms’ growth than the availability of labor and skills, including workers’ experience, general education of workers, technical and vocational education and training of workers, and high job turnover [9].

Despite being a less binding constraint on doing business in general, skill shortages, especially among managers, professionals, and technicians, have harmful effects on firm performance that differ by type of firm and sector. For example, the proportion of firms reporting problems in hiring due to inadequate skills among job candidates is usually higher for innovative firms than for more traditional firms, firms with international business contacts that for those without an international network, and firms with foreign ownership than for domestic firms. Innovative and dynamic firms exposed to international competition are more seriously affected by skill gaps than other firms because they tend to require modern, higher-order skills. At the same time, they are more likely to provide training to their workers, especially to managers and professionals [9].

Ukrainian firms participating in the Skills Toward Employment and Productivity employer survey in 2014 were also asked about the impact of existing skill gaps on their business. Nearly one in three surveyed firms in the information and technology sector reported that skill gaps reduce their efficiency, service quality, ability to retain and grow their client base, and innovation opportunities. Food producers also often reported losing clients and markets, efficiency, and innovation opportunities because of skill shortages. Perceived harmful effects of a lack of workers with the right skills were lower for renewable energy firms and agricultural growers, but the share of affected firms is still over 10%. Thus, the inadequacy of workers’ skills seriously affects firm performance, technological investments, and the overall competitiveness of transition economies.

Workers’ perspective on skill mismatch and overeducation

Qualification mismatch is by far the most intensely studied type of mismatch, especially in transition economies. Although analyses of skill mismatch are even more relevant from a policy perspective, such studies are much less common, mainly because direct information on workers’ skills and the skill requirements of their jobs is less easily available than data on educational attainment.

Overeducation in advanced transition economies: Estonia, Poland, and other new EU members

Empirical evidence on overeducation or other type of skill mismatch in the new EU member states is scarce. A study of the incidence of overeducation and its impact on wages in post-communist Estonia reaches some interesting conclusions [10]. First, the incidence of overeducation increases with age among women and is significantly higher among older men (50 years and older) than among younger men (16–29 years), with no statistically significant difference for prime-age workers (30–49 years). Second, wage losses due to overeducation (about 24%) appear to be much higher than in the EU15 countries where similar studies were done. Moreover, the wage penalty associated with overeducation increases with age and is unlikely to be driven by unobserved worker characteristics. These findings are consistent with expectations for a rapidly changing transition economy where a large number of workers educated in a centrally planned economy suffered a depreciation of skills.

One of the most influential studies of overeducation in transition economies explored changes in the persistence of overeducation in Poland over 20 years of its post-communist transition, and whether overeducation can be regarded as a stepping stone to more adequate jobs or as a trap for affected workers [11]. It found high persistence of overeducation: over half the people working in jobs below their level of education remained in that situation five years later, and about 10% were persistently overeducated. Moreover, younger workers who entered the labor market in the late 1990s or early 2000s were much more likely to experience persistent overeducation than their older counterparts. Thus, jobs with low educational requirements appear to be traps for educated young workers. The Polish labor market was unable to accommodate the rapidly growing numbers of college-educated workers, in part because of the low quality and irrelevance of education in some colleges. The study concludes that popular policies regarding public investment in tertiary education might need reconsideration, given that jobs with low educational requirements appear to be traps for educated young workers.

Several cross-country studies also deal with education–job mismatch and its impact on productivity. One study, based on European Labor Force survey data for 2005–2011, examined the incidence of vertical and horizontal mismatch in 30 European countries including ten transition economies that joined the EU [12]. It also explored the relationship between different measures of mismatch and per capita output. The study found a higher incidence of undereducation than of overeducation for most countries and years, contrary to other studies for developed and transition economies [1], [3], [4]. This difference is probably attributable to the statistical approach used to measure the incidence of overeducation and undereducation, which has many disadvantages. Estimates of the incidence of horizontal mismatch in Central and Eastern European countries in 2011 vary from 18% in Slovakia to more than 37% in Latvia. Preliminary analysis of the factors affecting real per capita output growth reveals a negative effect of vertical mismatch on long-run growth, with statistically significant effects in the Czech Republic, Estonia, and Romania [12]. These findings suggest a need to reconsider the design of public funding of education in order to adjust the supply of skilled labor to its demand.

Another study examined the relationship between the share of college graduates at the district level and the share working in occupations not requiring a college education in the Czech Republic, Hungary, and Slovakia [13]. It found empirical support for the hypothesis that a large supply of skilled labor shifts the skill bias of the local economy and decreases the fraction of college graduates who are working in occupations not requiring a college education. Increasing the educational attainment of the local population might be used as a tool to attract advanced technologies and stimulate development of local labor markets.

Overeducation in late-reforming transition economies: Armenia, Georgia, Macedonia, and Ukraine

A recent comparative study based on data from the Skills Toward Employment and Productivity household surveys in Armenia, Georgia, Macedonia, and Ukraine in 2012/2013 used a self-assessment approach to measure vertical education–job mismatch [1]. The study applied the same methodology to measure the incidence of education–job mismatch in OECD countries using the Programme for the International Assessment of Adult Competencies survey.

While the study found a high incidence of overeducation in late-reforming transition economies, the incidence was generally on par with that in many mature market and transition economies (Figure 1). The percentage of workers whose highest level of education is higher than the level of education they deemed necessary to carry out/get their job varied from about 13% in Italy to more than 33% in France, Georgia, and Japan. However, all four late-reforming transition economies have considerably lower incidences of undereducation than mature market economies. These results need to be interpreted with caution because they compare urban population in the four late-reforming transition economies with the entire population in most OECD countries or to subregional populations (in Belgium and the UK) [1]. Moreover, many workers who are classified as formally over- or undereducated are adequately matched to their jobs in terms of productive skills [3].

As expected, overeducation in transition economies affects a large share of older workers, from 16% in Macedonia to about 38% in Georgia (Figure 2). The relationship between age and overeducation observed in Armenia, Georgia, and Ukraine is in contrast to empirical evidence in mature market economies (and to the predictions of labor market theories) showing that older workers are less likely to be overeducated because they have more experience, better relevant skill sets, and more opportunities for upward mobility [3], [4]. This finding suggests that rapid structural changes in transition economies made obsolete many of the diplomas and qualifications acquired by workers under communist economic and political systems, explaining the mismatch between formal education and workers’ skills, on the one hand, and job requirements on the other.

An education-specific analysis of overeducation reveals that these transition-related changes have had the largest impact on workers with tertiary short-cycle education, which was classified as secondary specialized education under the Soviet system. The proportion of overeducated workers in this group varies from 40% in Ukraine to 66% in Georgia (see Figure 2). The high rates of overeducation in this group occurred mainly because the number of jobs that are supposed to require this level of education declined considerably during the mass restructuring of the transition economies toward trade and other less knowledge-intensive services [1]. In a keen competition for a limited number of white-collar jobs, holders of college diplomas in obsolete fields of study and with irrelevant skills have been crowded out by their better educated peers (those with university diplomas).

Perceived overeducation is a more serious problem in sectors with more unskilled jobs and less sophisticated hiring practices: trade, accommodation, and food service activities compared with other economic sectors (see Figure 2); self-employment compared with wage work; informal work compared with formal employment; private-sector jobs compared with public-sector jobs; and small firms compared with larger ones [1], [9].

A preliminary analysis of the composition of overeducated and well-matched employees by field of study shows that workers in Armenia and Macedonia with a degree in engineering, manufacturing, or construction account for a significantly larger share of overeducated workers than do their well-matched counterparts. During economic restructuring, as jobs shifted from industry to services, many displaced workers with industry-related degrees were forced to accept lower-level jobs in other sectors that did not require specific training and skills or for which retraining did not take a lot of time and effort. In Georgia, workers with a degree or certificate in services and office work are overrepresented among overeducated workers compared with well-matched employees. Overeducation of workers with a formal education in the services sector can be attributed to distortions in the modern education system in Georgia rather than to job reallocation during transition [1].

Finally, a study based on the Skills Toward Employment and Productivity household surveys of urban workers reveals a large proportion of overeducated workers who have been in their current jobs for more than five years: from 37% in Armenia to more than 53% in Macedonia [1]. Long periods of overeducation imply a loss of human capital as the skills and competencies acquired through formal education become obsolete. As a result, large numbers of formally educated workers, both young and old, risk getting trapped in their current jobs with little chance of moving to better matched jobs due to state dependence and low access to training opportunities.