Skills mismatch, job quality and the productivity puzzle

The UK’s very poor recent trend productivity performance features prominently in debate following yesterday’s Budget, with pessimism over prospects for improvement a key reason for downward revisions to GDP growth forecasts. The so-called ‘productivity puzzle’ continues to exercise the minds of economists and has yet to solved. But some insights might be gleaned from figures just released by the Office for National Statistics (ONS) estimating the extent of skills mismatch in the UK labour market i.e. the proportion of people either overeducated or undereducated for the jobs they are doing.

The ONS has looked at how well the level of educational attainment of people in work matches with the average educational attainment of the occupation they are employed in. Mismatch is an indicator of how efficiently labour is allocated within the economy, which will in turn affect productivity since people will perform best in jobs suited to their skills.  

By the end of 2015 just over two thirds (68.7%) of people of working age (16-64) were considered matched to their employment. Of the remainder who were mismatched (ostensibly ‘in the wrong job’) 16.1% were overeducated and 15.1% undereducated.

Over time (the ONS look at the period Q2 2002 to Q4 2015) the match rate has generally been on upward trend but found to fluctuate. The rate peaked prior to the recession, fell during the recession, recovered to just above the pre-recession peak by the end of 2012, and then fell again to the end of 2015 figure of 68.7%. In other words, mismatch was on the increase during much of the jobs boom of recent years, which we also know was a time of generally poor growth in labour productivity. Moreover, while by the end of 2015 the under-education rate was around 1.5 percentage points below the pre-recession high the over-education rate was around 2 percentage points above the pre-recession low.

Put together, these figures show that while the UK labour market serves to match the vast majority of people to the ‘right job’ in terms of their education the dominant trend is that toward a higher rate of over-education. This is worrying and suggests the UK is underusing an increasing proportion of available talent, with women and people in part-time jobs in particular employed in occupations for which they are overeducated. When one acknowledges waste of available talent on this scale it’s no wonder UK productivity performance is struggling to improve.

Be clear, however. The response to over-education should be intensified policy efforts to increase demand for skills and promote better quality jobs. The response should not be to cut the supply of high level skills to the labour market, for example as advocated by commentators who think the UK is nowadays producing ‘too many graduates.’ A high productivity economy needs both better jobs and more highly educated workers.