Education-occupation mismatches and labor productivity

What is the impact of educational mismatch on firm productivity? And do these effects differ between the most and least productive firms? This study investigates how education-occupation (mis)matches relate to firm productivity. The analysis focuses on Portugal, a country marked by persistent low productivity growth and a rising incidence of mismatches, and draws on a rich matched employer-employee dataset covering 2010–2019.

A mismatch occurs when a worker’s education is either below or above the economy’s norm for their occupation. Undereducated workers fall short of this benchmark, while overeducated workers exceed it. The results suggest that under-education undermines productivity, while over-education has a positive but limited effect. Firms could achieve greater gains by assigning highly educated workers to occupations that fully match their qualifications, thereby raising occupational requirements.

Part of this pattern reflects selection, since more productive firms tend to attract more educated workers. Yet internal management decisions also play a role. Hiring, allocation, and promotion practices are central in determining whether qualifications translate into productivity. High-productivity firms, while better positioned to benefit from overeducated workers, are more vulnerable to the adverse effects of under-education, likely because such firms engage in more complex tasks requiring complementary skills. In less productive firms, under-education may be driven largely by structural factors that are difficult for managers to change, such as limited access to skilled labor markets or institutional constraints.

In sum, educational mismatch matters for firms. Addressing under-education through economy-wide policies and making better use of over-education through internal practices both have the potential to boost productivity.

Click here to go to the paper by Beatriz Rocha, Hugo Figueiredo, Carla Sá, and Miguel Portela.