Overeducation, performance pay and wages: evidence from Germany

Abstract

Overeducated workers are more productive and have higher wages in comparison to their adequately educated coworkers in the same jobs. However, they have lower wages than their similarly educated peers who are in correctly matched jobs. This study examines the hypotheses that overeducated workers sort into performance pay jobs as an adjustment mechanism and that performance pay enhances their wages. Using the SOEP, I show that overeducation associates with a higher likelihood of sorting into performance pay jobs and that performance pay significantly improves the wages of overeducated workers. The findings hold in endogenous switching regressions and several robustness checks.