The impact of Over-education and Under-education on Earnings: Egypt in a Post Revolutionary Era

Abstract: Previous research has mainly addressed the impact of over/under-education on wages in developed countries. Therefore, this paper attempts to fill the void gap in the literature by empirically examining the impact of over-education and under-education on wages in a developing country, namely Egypt, using the 2012 Egyptian Labor Market Panel Survey (ELMPS). In order to do so, actual years of educations are divided into years of required-education, over-education, and under-education using the realized matches approach. Two modified specifications of the semi-logarithmic Mincer equation are used to estimate the returns: the ORU specification proposed by Duncan and Hoffman (1981) and the dummy variables specification proposed by Verdugo & Verdugo (1989). We contribute to the literature by employing an instrumental variable approach in order to account for the endogeneity of the three components of education. Our results indicate that using the conventional OLS method leads to an under-estimation of the returns to over-education because of ability bias. It is found that returns to over-education are positive and in fact they are higher than returns to adequate education, which contradicts previous literature findings. It is also found that there is a trade-off between over-education and years of experience.