Overeducation among immigrants in Sweden: incidence, wage effects and state dependence

Sweden has been an immigration country since WW2. Up to the early 1970s mainly labor migrants arrived, but since the 1980s the majority of entrants has been refugees and tied movers. At the end of 2012, 1.5 million individuals born outside Sweden lived in the country, corresponding to 15 percent of the population (Statistics Sweden 2012). Although employment has traditionally been higher among labor migrants than among refugees or tied movers, since the 1970s both groups have had employment rates below that of natives. In 2009 the employment rate for foreign born men was about 68 percent compared to about 78 percent among native men. Among foreign born men and women from countries outside Europe the employment rate was 57 percent (Eriksson 2011). Differences in human capital characteristics such as education, work experience and Swedish language proficiency but also discrimination are likely explanations for this gap.

There is not only a problem of low employment rates among non-Western immigrants but also a problem of underutilization of their skills once employed. Previous studies, both for Sweden and for other countries, find that the incidence of overeducation, i.e. the degree to which workers have an education that exceeds the one that is required for the job, is larger among immigrants than among natives (Dahlstedt 2011; Nielsen 2011; Wald and Fang 2008). It is often assumed that due to limited transferability of human capital an initial mismatch, or overeducation, among immigrants can be expected. However, if there is a higher degree of persistence and state dependence in overeducation among immigrants this would be a sign of a more severe problem. By state dependence we mean that overeducation in a previous period will have an independent effect on current overeducation.

Why is there a problem with being overeducated? First of all this means that the skills of workers are not fully used. But it is also a problem because the returns to education for those overeducated are lower than the returns to the same level of education for workers that are correctly matched. This is one of the most persistent findings in the literature on overeducation; overeducated workers earn more than correctly matched workers in the same types of jobs but earn less than correctly matched workers with the same years of schooling see e.g. (Chiswick and Miller 2008; Chiswick and Miller 2010a; Duncan and Hoffman 1981; Hartog 2000; Korpi and Tåhlin 2009). Studies focusing on the wage effects of overeducation for immigrants tend to find that the return to overeducation is lower for immigrants than for natives meaning that immigrants lose more from being overeducated than natives do (Nielsen 2011; Wald and Fang 2008).¹

In this paper we address the questions of the incidence and wage effects of overeducation, thus bringing evidence on these issues in the Swedish case, and we also extend the analysis to include estimations of state dependence. In particular, we study if state dependence is a more severe problem for immigrants than for natives, which is a novel question in the literature on overeducation of immigrants. If this is the case, this is an indication that overeducation is not only a passing problem for immigrants but that it may have scarring effects affecting the integration of immigrants also in the long run. This is the major contribution of the paper. The use of rich Swedish register data gives us the possibility of estimating panel models that control for unobserved heterogeneity. Furthermore, the Swedish case is interesting from an international standpoint because even though it has had a fairly long history of receiving immigrants, its high-wage, high-labor cost economic regime may present barriers to immigrants to utilizing their skills.

We estimate models of state dependence in overeducation by regressing overeducation in period t on overeducation in period t-1. To handle the initial conditions problem we estimate random effects dynamic probit models by including controls for initial overeducation as has been suggested by Wooldridge (2005). To analyze these questions we use Swedish register data on all employed workers covering the period 2001 to 2008.

The remainder of the paper is structured as follows. In section 2 the literature in the area is reviewed, in section 3 the data, variables and methods are described, in section 4 the incidence of overeducation is discussed, in section 5 the returns to actual, required, over- and undereducation are analyzed, and in section 6 state dependence in overeducation is analyzed. Section 7 summarizes our findings and we draw some conclusions.

The literature on educational mismatch among immigrants is small but increasing, linking the immigrant wage assimilation literature founded by Chiswick and Borjas to the literature on overeducation (Duncan and Hoffman 1981; Hartog 2000; Verdugo and Verdugo 1989). Many studies find that immigrants have higher rates of overeducation than natives, though the size of the gap varies by immigrant ethnicity and the destination labor market. For instance, while the rates of immigrant overeducation tend to be higher than those for natives in many countries (see Battu and Sloane 2002; Fernández and Ortega for Britain, Fernández and Ortega Fernández and Ortega 2008 Lianos 2007 Green et al. 2007 for Australia, and Nielsen 2011 for Denmark), substantially higher rates of immigrant undereducation compared to natives are found for the US and Canada (Chiswick and Miller 2008 Chiswick and Miller 2010a).

In the search for reasons underlying the immigrant educational mismatch, one starting point is to decompose the lower payoff to schooling for foreign born from non-Western countries compared to natives. Chiswick and Miller (2008) present a new decomposition technique that links overeducation to a less than perfect transferability of immigrants’ human capital and undereducation to favorable selection in migration. Applying data from the 2000 U.S. Census, they find that natives and immigrants receive about the same return to the level of required education in the occupation. The lower payoff to schooling for immigrants is largely accounted for by the higher proportion of undereducated immigrant men relative to native men and their relatively strong wage performance. Thus, the evidence is consistent with the notion of self-selection of immigrants with superior ability or motivation to the US.

The same decomposition technique applied to Canadian data shows that the lower return to schooling of immigrants is not as affected by undereducation as in the US, since the effect is only twice as large as the effect of overeducation, whereas it is about ten times as large in the US (Chiswick and Miller 2010b). Evidence from Australia reveals, somewhat paradoxically, that over and undereducation are equally important in accounting for the lower payoff to schooling for immigrants, indicating that the Australian strict screening policy does not necessarily improve skill transfers across countries (Chiswick and Miller 2010d).

Our paper makes two contributions to this literature. First, evidence on immigrant educational mismatch is sparse in Sweden. Korpi and Tåhlin (2009) track education, wages and wage growth in Sweden over the period 1974–2000 and find significant differences in returns to education across matched categories even after that variation in ability is taken into account. Furthermore, they find that wage growth among overeducated workers does not exceed that of other groups. This means that overeducated workers in Sweden are penalized early on in their careers by a lower rate of return to schooling, and that this effect persists over time. They estimate both cross-sectional and fixed effects models correcting for unobserved ability effects, but they do not perform separate analyses for natives and immigrants. A recent paper by Dahlstedt (2011) on occupational match based on logistic match regressions run on the LISA database from 2003 confirms that immigrants have lower rates of match and higher rates of overeducation than the native population. He also shows that it is important to differentiate between immigrants according to country of origin – immigrants from Iraq in particular display low levels of match and a high level of overeducation.

Second, we extend the immigrant educational mismatch research area by estimating the extent to which there exists state dependence in overeducation and if this appears to be a more severe problem among non-Western immigrants than among natives. According to the career mobility hypothesis (Sicherman and Galor 1990) overeducation is a temporary phenomenon and should be seen as an investment in work experience that could lead to better employment opportunities in the future. A higher incidence of overeducation among recently arrived immigrants is expected. Mavromaras and McGuinness (2012) analyze state dependence in overskilling in the Australian labor market. Overskilling differs slightly from the concept of overeducation; overskilling is defined as a situation when wage-earners report that their skills are not fully utilized in their job. They find evidence of state dependence in particular among workers with higher education. Their study is based on working age employees but does not distinguish between natives and immigrants. A high degree of state dependence in overskilling contradicts the idea of overskilling being a temporary phenomenon.

Piracha et al. (2012) analyze the correlation between educational mismatch in home and host countries for immigrants arriving to Australia. They show that part of the higher incidence of overeducation among immigrants can be explained by that they have been overeducated already in their home country.

Dolton and Vignoles (2000) study persistence in overeducation and find that 38 percent of U.K. graduates were overeducated in their first job and that 30 percent were still overeducated six years later. Frenette (2004) investigates overqualification among Canadian workers and finds that graduates who enter jobs for which they are overqualified shortly after graduation often remain overqualified in the near future. Analyzing transitions from overeducation using data for two consecutive years, Rubb (2003) finds that three out of four overeducated workers in year t are still overeducated in year t + 1. Cuesta and Budría (2012) use the German Socio-Economic Panel to analyze overeducation dynamics and personality. Their results are in line with previous research suggesting that overeducation mainly reflects unobserved differences in personal characteristics such as ability or motivation. Regarding state dependence in overeducation, their calculations suggest that almost 18 percent of the overeducation risk is due to individual state dependence.

Our overview of the existing research on persistence and state dependence in overeducation indicates that there is evidence of a high degree of persistence. None of the above mentioned studies have however focused on heterogeneous effects across different groups of workers, such as natives and immigrants. This paper adds to the literature in analyzing whether state dependence is a more severe problem for non-Western immigrants than for natives in Sweden.

First, we find that the incidence of overeducation differs depending on the method used for defining the occupational norm. Using the modal value as the norm has also in previous studies produced estimates of overeducation that are higher compared to the other methods, while the mean method and job analysis give similar results (see for example Bauer 2002 and Nielsen 2011). However, all methods show that the incidence of overeducation is higher among immigrants than among natives. Using the mode method, the incidence of overeducation among males is about 33 percent among natives and between 42 and 50 percent among non-Western immigrants, depending on birth region. Overeducation levels are slightly lower for female natives and immigrants. These numbers are in line with what has been found for Denmark (Nielsen 2011), the US (Chiswick and Miller 2008) and Germany (Bauer 2002). Dahlstedt (2011) reports a similar incidence of overeducation using job analysis and Swedish register data for 2003.

Looking at the incidence of undereducation, we find a slightly different pattern. Immigrants from the Nordic countries experience the highest degree of undereducation while immigrants from North America have the lowest incidence of undereducation. The difference in the incidence between natives and non-Western immigrants is not that large which is different from the incidence of overeducation, which we found to be much larger among non-Western immigrants.

With the descriptive evidence as a background, in this section we analyze the returns to over- and undereducation for natives and immigrants separately. Overall, the pattern for men and women are very similar.

The estimates of the returns to actual schooling may be affected by the degree of mismatches in the labor market as well as by the returns to over- and undereducation. For the US, Chiswick and Miller (2008) find that the payoff to schooling is lower for immigrants than for natives and a decomposition reveals that this is primarily a result of lower payoff to schooling among low-educated workers (upper secondary education for two years and below). The returns to over, under and required education in Sweden have previously been analyzed by Böhlmark (2003) and Korpi and Tåhlin (2009), but they do not compare natives and immigrants. A recent paper by Katz and Österberg (2013) analyze over and undereducation among childhood immigrants in Sweden. Their paper is however mostly descriptive and do not estimate the ORU-model or analyze state dependence in overeducation.

The returns to required schooling can be interpreted as the return to schooling for correctly matched workers. When required schooling is entered linearly into the regression there is in practice no difference between natives and immigrants. This means that given that workers are correctly matched, the return to education is about the same. This result is consistent with findings presented in (Chiswick and Miller 2008).

The returns to undereducation are about the same for natives and both groups of immigrants; for each year of undereducation, wages drop by 3 to 4 percent. There is however a large difference in the returns to overeducation. They are substantially smaller for non-Western immigrants than for natives; for each year of overeducation wages increases by 6.0 percent for natives but only by 1.7 percent for immigrants. Similar results have been found for Denmark (Nielsen 2011) and Canada (Wald and Fang 2008). As for Western immigrants, the estimated returns to overeducation are again between that of native and non-Western immigrants; for each year of overeducation wages increases by 4.7 percent.

One of the regularities is that the estimate for required education is larger than the estimate for overeducation but both are positive. This means that overeducated workers earn more than correctly matched workers in the same kind of jobs but less than correctly matched workers with the same education. However, our estimations reveal that the difference in the estimates is much larger for immigrants than for natives. Overeducated immigrants earn only slightly more than correctly matched workers in the same kind of jobs but much less than correctly matched workers with the same education. Large wage differences between the jobs that correctly matched and mismatched immigrants with the same education have, and compressed wage distributions and no individual wage bargaining within occupations could be the explanation.

Our results from the pooled cross sectional model and the fixed effects models are very similar: the returns to actual schooling are lower among immigrants, the returns to undereducation and required education are about the same while the returns to overeducation are substantially lower for immigrants.

Bauer (2002) argues that if there is a negative correlation between ability and overeducation, i.e. workers with lower ability would be more likely of being overeducated; we would therefore expect that the estimates in the pooled OLS model underestimate the returns to overeducation. This is not consistent with our findings since the estimates of the returns to overeducation, both for natives and immigrants, is lower in the specification where we control for unobserved heterogeneity. It is however interesting to note that the estimate for immigrants is much less affected by the inclusion of individual fixed effects than the corresponding estimate for natives.

A conclusion to be drawn from these results is that immigrants lose more from being overeducated in terms of lower wages. This is in contrast to the results for the US where immigrants gain more from being undereducated compared to natives Chiswick and Miller (2008).

It is worth stressing that the return to undereducation is about the same for natives and both groups of immigrants. That is, immigrants do not lose from being undereducated any more than natives. This is the reason for our focus on the persistence and state dependence in overeducation in the following section.

To summarize, we find that non-Western immigrants face a higher risk of being overeducated once they enter the labor market and lose more from being incorrectly matched. The outcomes for Western immigrants are not as bad, but still worse than that of natives. But is this a short run or long run phenomenon? We turn to this question in the next section.

Mavromaras et al. (2012) make a distinction between simple persistence and state dependence where the former can be interpreted as the duration of time an individual stays overeducated while the latter refers to the fact that previous overeducation has a direct causal effect on future overeducation. That is, state dependence is present if we find an effect of lagged overeducation on future overeducation once we have controlled for background factors that caused overeducation in the first place.

Since job changes, or lack thereof, are likely to be important elements of the persistence in overeducation we take a closer look at the extent to which workers change jobs. Looking at job changes between consecutive years 13.9 percent of native women compared to 14.8 percent among immigrant women change workplace from one year to the next. For men the corresponding figures are 13.7 percent (natives) and 13.9 percent (non-Western immigrants). Job changes occur to a similar degree for Western immigrants. Estimating the probability of changing workplace in a regression framework and controlling for years of schooling, age, being married, having young children, sector, and municipality, we find that non-Western immigrants are less likely to change workplace between two consecutive years.⁶

The question of how important job changes are for explaining state dependence is analyzed below but as a descriptive exercise we have looked at persistence in overeducation among job switchers only. A bit surprisingly, we see that persistence in overeducation is also high among those switching jobs. Among native men that were overeducated in 2001 and had switched job in 2008, 63 percent were still overeducated. Among non-Western immigrants this share is around 75 percent. This shows that changing job is no guarantee for improved matching on the labor market.

In all models and for both natives and immigrants we find indications of a very high degree of state dependence in overeducation. In the model with controls for initial overeducation the estimates are about 2.1 for natives, 2.2 for Western immigrants and around 2.4 for non-Western immigrants. Using a similar method and Australian survey data over six waves, the highest estimate of lagged overeducation that is reported by Mavromaras and McGuinness (2012) is 1.13, i.e. substantially below the estimates we find. Although there are many factors to consider when making cross-country comparisons, it has been argued that overeducation might be more self-persistent in countries with greater labor market rigidity (Verhaest and Van der Velden, 2013).

Even if it is difficult to compare estimates across groups we can say something about the state dependence among natives as compared to immigrants. First, we note that the standard errors of the estimates are small which makes the 95 percent confidence interval rather narrow. As a result, the confidence intervals of the same estimate for the two groups are not overlapping making the estimates of the lagged dependent variable for natives and immigrants being significantly different from each other. It might thus seem reasonable to conclude that state dependence is a more severe problem among non-Western immigrants than among natives but that it is exists and is fairly large also for natives. The estimates for Western immigrants are between those for natives and non-Western immigrants.

State dependence is present if overeducation in an earlier period has an independent effect on current overeducation. By taking into account the initial conditions problem we hope to be able to distinguish this from the heterogeneity between workers that makes some more likely to be overeducated due to unobservable factors such as ability. Since we have found that state dependence is present and stronger among non-Western immigrants this would mean that immigrants are more negatively affected in the future by having been overeducated earlier in their careers. This is different from saying that immigrants on average are more likely to have, to the researcher, unobservable qualities that increase the risk of being overeducated.

Looking at the estimate for having changed a job we find interesting results. First, we note that the inclusion of job changes does not significantly change the estimate of lagged overeducation suggesting that there is a high degree of state dependence even after having controlled for job changes. Second, the effect of changing job on overeducation differs between natives and immigrants. For natives and Western immigrants, changing jobs seems to be correlated with an increasing probability of being overeducated while for immigrants we find that changing jobs is correlated with a lower probability of being overeducated.

In specification II and III for immigrants we successively add region of birth and occupation. Note that occupation is already added in specification III for Natives. As discussed earlier, the quality of education in the home country of the immigrant does not need to be the same as the corresponding Swedish education. To investigate whether the higher persistence of overeducation of immigrants just reflects a different quality of education, lack of language proficiency or cultural factors, we add region of birth effects in specification II. The estimate on overeducation remains unchanged. Even if the education obtained is of the same quality, due to entry restrictions in certain occupations, it may take time for immigrants to get their credentials validated. As a partial test of this hypothesis, we control for both region of birth and occupation in the last specifications of the model in Tables 9 and 10. Doing so reduces the estimate on overeducation from about 2.6 to 2.2. for Western immigrants and from 2.8 to 2.4 for non-Western immigrants. Thus, imperfect transferability of human capital across countries has greater merit as explanation but even after controlling for region of birth and occupation, persistence in overeducation for immigrants significantly exceeds that for natives.

Comparing men and women, both simple persistence and state dependence is slightly lower among women than among men, which might be explained by the sample of women being more select than the male sample or that women have an outside option. But also for women we find a positive correlation between changing job and the probability of being overeducated for natives and Western immigrants while we find a negative correlation for non-Western immigrant women. For women, the persistence effect is reduced when controlling for occupation.⁷

This paper studies educational mismatch among non-Western immigrants in Sweden. We first analyze differences in the incidence of overeducation and find that the overeducation is higher among all groups of immigrants than natives but the difference is larger for regions from which Sweden traditionally receives many refugees and tied movers. Concerning the incidence of undereducation, we find that it is highest among immigrants from the Nordic countries and lowest among immigrants from North America. The difference between natives and non-Western immigrants is smaller than the corresponding difference in overeducation. Turning next to the wage effects of educational mismatch, we find that on average the return to required schooling is about the same for natives and immigrants. However, the returns to overeducation are substantially smaller for immigrants than for natives; immigrants lose much more from not being correctly matched than natives do. The return to undereducation is about the same for natives and both groups of immigrants.

However, there are some caveats to our analysis. The estimates of the returns to actual, required, under and overeducation presented in this paper should be interpreted with some care. There are several sources of selection that might influence our results. First, selection into over or undereducation is not random. It is difficult to determine in which direction the selection goes. Some have argued that there is negative correlation between ability and the probability of being overeducated since less able workers might require a higher education to perform a job for which the formal requirements actually are lower. But in the paper we argue that this might not be true for immigrant workers. Employers may see overeducation as a signal of ability and conscientiousness and prefer to hire immigrant workers with a higher education than what is actually needed to perform the job instead of hiring an immigrant worker with the required educational qualifications.

In the third part of the paper we analyze state dependence in overeducation, in particular if this appears to be a more severe problem among immigrants than among natives. We choose to focus on state dependence in overeducation since there are smaller differences between natives and immigrants in the incidence of undereducation and the return to undereducation is about the same for natives and immigrants. We find that there is a very high degree of state dependence in overeducation among natives as well as among immigrants, but it is stronger for immigrants than for natives. One hypothesis that may explain this result is that job mobility is lower for immigrants compared to natives in Sweden, and hence will result in a greater degree of state dependence in a spell of overeducation. However, job mobility in our sample is about the same for natives and immigrants and even after controlling for job changes in the regression, there is a higher degree of state dependence among immigrants. A novel and interesting result is that changing job seems to be associated with a higher probability of being overeducated for natives while immigrants that change jobs are less likely of being overeducated compared to those who do not change jobs. Another hypothesis we test is whether quality of education or imperfect transferability of human capital obtained in the home country could explain the greater persistence of overeducation among immigrants. Our results indicate that the latter explanation does indeed hold some merit, but only in part.

We will conclude by discussing some policy implications. If the explanation that immigrants are overeducated is because they have insufficient knowledge of the Swedish language or a lower quality of education then increased and improved education in Swedish could be one method to improve the situation. However, controlling for region of birth did not reduce persistence in overeducation. Our results rather point to the fact that immigrants’ qualifications are not viewed the same as Swedish ones, and thus validation of credentials but also additional complementing education could be part of the solution. Such policies exist already but could be further developed. Compared to those born in Sweden immigrants on average have less information about the Swedish labor market and their networks may be less suited for finding a job corresponding to their qualifications. More intense assistance from the labor market administration may be part of a solution as well. All policy changes have of course to be evaluated.

¹For an overview of the literature on educational mismatch of immigrants, see Piracha and Florin (2012).

²Employees at Statistics Sweden with good knowledge of the 1990 census indicate, however, that many may have reported an education level higher than their acquired one.

³Carlsson and Rooth (2007) show that the degree of employer discrimination in the hiring process varies with the characteristics of the job and the workplace.

⁴We have also estimated the probability of being overeducated using the mean method to define the educational norm within occupation. All marginal effects are slightly smaller using the mean but the sign of the estimates are not affected by the way overeducation is defined.

⁵Using the mean method when defining the educational norm leads to a lower degree of persistence for all groups. The mean method implies that the norm is an interval for years of schooling and not an absolute number of years of schooling.

⁶The results are not presented in the paper but are available from the authors upon request.

⁷We have also estimated models for state dependence in undereducation (results available on request). Our focus in this paper is, however, to look more at overeducation, since immigrants in Sweden are hurt more by overeducation relative to natives, whereas they face the same penalties for undereducation. We find patterns of persistence also in undereducation.