Mismatch of educational skills in the labor market is an emerging topic in the field of labor economics, partly due to its link to labor productivity. This is the first application of this question to New Zealand data. In this paper we examine the incidence of educational mismatch and its earnings effects. Using micro data drawn from the Household Labour Force Survey and the New Zealand Income Supplement (HLFS/NZIS) for the years 2004 to 2007, we find a noteworthy incidence of both over- and under-education. We also find that earnings returns to required years of education exceed the returns with over- and under-education, with a greater earnings penalty associated with under-education. We test hypotheses on three alternative models of educational mismatch. As the New Zealand labor market exhibits assignment-type matching, we argue that the higher than average public expenditure on education serves to improve economic performance. We further examine results stratified by age group and for the native-born and immigrants, and find that our results are robust across these groups.
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