Overeducation and skill mismatch of university graduates in Taiwan

Abstract Overeducation and skill mismatch have become crucial issues in the modern labor market. Taiwan's rapid structural transformation under industrialization since 1980 followed by the policy of expanding higher education after 1990 provides an excellent scenario for investigating the issues of overeducation and skill mismatch. Utilizing data from the Taiwan Education Panel Survey (TEPS) and its follow‐up survey (TEPS‐B), this paper develops an empirical strategy to test the effect of overeducation and skill mismatch on wage and job satisfaction for university graduates. As in the literature, Taiwan shows significant wage loss for both overeducation and skill mismatch and the wage penalty is higher for overeducation than for skill mismatch. Results from wage performance and job satisfaction estimations suggest both overeducation and job mismatch caused efficiency loss; however, the high wage loss and lower job dissatisfaction for overeducation imply overeducation may arise because of self‐selection under individual heterogeneity, which is not purely an efficiency loss. Therefore, the policy goal should properly focus on mitigating skill mismatch rather than overeducation.