Media Briefings


  • Published Date: January 2009

Skilled workers who are over-qualified for their current job and looking for a new one explain an important fraction of recent increases in wage inequality, according to research by Professor Juan José Dolado and colleagues.

Their study, published in the January 2009 issue of the Economic Journal, shows that ‘on-the-job search’ by over-qualified workers stimulates the creation of skilled jobs. At the same time, workers who quit jobs for which they are over-qualified reduce the stability of those unskilled jobs.

What’s more, the research finds, on-the-job search widens wage differentials among highly educated workers. For one thing, they may they end up in different types of jobs, including ones for which they are over-qualified.

But in addition, when they are overqualified, they may suffer a pay cut relative to less educated workers who are more appropriately ‘matched’ with the job. Think of the MBA and the high-school dropout both serving drinks at the same bar.

If their productivity is not too different (if an MBA degree does not make you better at serving drinks), the fact that the MBA worker may quit as soon as he finds a better job implies that the bar owner will discount the stream of profits that she may obtain with this worker at a higher rate and therefore pay him less. The worker may still be happy with lower pay because he has the option of getting a better job via on-the-job search.

Over-education is one of the most important mechanisms for labour market adjustment when there is an excess supply of highly skilled workers, as may be the case in some industries – such as financial services – for many economies during the current crisis.

There is debate about the consequences of this phenomenon and the short- and long-term effects for both the over-qualified worker and the economy as a whole. This study contributes to our understanding of this phenomenon by analysing a model of the labour market in which there are two types of jobs – skilled and unskilled – and two types of workers – highly educated and less educated.

Because of ‘search frictions’ (firms cannot fill vacancies and unemployed workers cannot locate jobs immediately), highly educated workers who lose their jobs may find it optimal to accept unskilled jobs for which they are over-qualified rather than remain unemployed. They do so because they keep the option of moving to a better job through on-the-job search.

By contrast, less educated workers cannot be ‘mismatched’ since skilled jobs can only be filled by highly educated workers. For example, a financial analyst with an MBA degree can become a bartender but a high-school dropout, who may be able to serve drinks in a bar, cannot become a financial analyst. Thus, the job seekers in this economy are the unemployed plus the mismatched workers.

There is ample empirical evidence suggesting that job-to-job transitions are a key element in total labour market turnover. For example, in the United States, 55% of the total separations of workers with a college degree are due to job-to-job flows while that proportion falls to about 30% for workers with at most a high-school degree. Similar figures hold for several EU countries, including the UK.

The results of this study show that the more transitory skill mismatch by over- qualified workers is, the more negative will be the prospects for less educated workers. This is because on-the-job search stimulates the creation of skilled jobs since the fact that mismatched workers stay in the pool of job seekers facilitates filling these jobs.

Moreover, the quits by over-qualified workers reduce the stability of unskilled jobs, lowering their profitability. These effects result in a shift of the job distribution towards skilled jobs, which induces both a fall in the job finding rate of less educated workers and a high separation rate for unskilled jobs.

Simulations in the study suggest that over-education and on-the-job search explain quite an important fraction of the increase in wage inequality, and that a significant part of this additional wage dispersion is due to a widening of the within-education and within-occupation wage inequality that is observed in many OECD countries.


Notes for editors: ‘On-the-job Search in a Matching Model with Heterogeneous Jobs and Workers’ by Juan José Dolado, Marcel Jansen and Juan Jimeno is published in the January 2009 issue of the Economic Journal.

Juan José Dolado and Marcel Jansen are at the Universidad Carlos III de Madrid. Juan Francisco Jimeno is at the Banco de Espana.

For further information: contact Juan José Dolado +34-91 6249300 (email:; or Romesh Vaitilingam on 07768 661095 (email: