Abstract:
This study contributes to the literature that highlights the penalties of education-occupation
mismatch in terms of earnings across different employment statuses. Most existing literature analyzing
the education-occupation mismatch has focused on paid employees, overlooking self-employed
individuals, and has not controlled for sample selection bias and unobserved heterogeneity bias
simultaneously. Therefore, the objective of this study is to analyze the impact of education mismatch on
earnings across different employment statuses after correcting for both sample selection bias and
unobserved heterogeneity bias. To achieve this objective, we applied the methodology of Duncan and
Hoffman (1981) to the Pakistan Social and Living Standards Measurement (PSLM), 2019-20. Our
results show that after controlling for unobserved heterogeneity bias and sample selection bias, overeducation has no positive value for both paid employees and the self-employed. The returns from overeducation based on the OLS model might be overestimated if overeducated workers possess lower average
ability levels, whereas the returns of adequately educated individuals increase after correcting for the
bias and are significantly higher for self-employed individuals compared to paid employees.
