Wage effects of cognitive skills and educational mismatch in Europe

This paper analyzes the returns to education and educational mismatch in thirteen European countries taking account not only of years of education but also of cognitive skills actually acquired by workers. Using the PIAAC database, our results suggest that both years of education and skills contribute to determine wages, with higher returns to years of education as the level of skills increases. Educational and skills mismatches appear to be two different phenomena, with educational mismatch lying behind wages. It is also found that the higher the level of skills achieved by an individual, the higher the returns to years of required education or to years of overeducation. Policy implications are derived as regards educational mismatch, which reflects inefficiencies in the allocation of the educational resources, and as regards the relevance of cognitive skills, leaving room for improving the quality of education to fully take advantage of educational investments.