The Effects of Over-Education on Returns in the Graduate Labour Market

Using a Household Income Survey ( HIS), this study examines the private returns to education in Malaysian financial sector. First, we estimate the private returns to education using the highest certificate qualification or "sheepskin effects". Secondly, we analyse the trend of private returns to education during the years 2002-2007. Thirdly, we examine the effects of educational mismatch on private returns to education. The simple Ordinary Least Squares (OLS) estimator with robust standard errors is employed to estimate the earnings function. Our results indicate the presence of an over-education situation among degree-educated workers despite enjoying higher private returns. Such over-qualification in the financial sector is due to the mismatches in the supply of degree-educated workers for medium-skilled positions, which is now outstripping the supply of high-skilled workers. Interestingly, our results are found to contradict most of the previous empirical studies. Hence, our study is believed to contribute to the literature by explaining the phenomenon of over-education using the signalling hypothesis. Since over-education reflects inefficiencies in the allocation of resources, Institutes of Higher Learning (IHL) need to increase their interaction with industry in order to find a solution to the incidence of mismatch which is partly due to the lack of integration between education providers and employers in the demand driven labour market. (C) 2016 Published by Future Academy www.FutureAcademy.org.uk