Previous research has mainly addressed the impact of over/undereducation
on wages in developed countries. Therefore, this paper attempts to fill the void
gap in the literature by empirically examining the impact of over-education and undereducation
on wages in a developing country, namely Egypt, using the 2012 Egyptian Labor
Market Panel Survey (ELMPS). In order to do so, actual years of educations are divided into
years of required-education, over-education, and under-education using the realized matches
approach. Two modified specifications of the semi-logarithmic Mincer equation are used to
estimate the returns: the ORU specification proposed by Duncan and Hoffman (1981) and
the dummy variables specification proposed by Verdugo & Verdugo (1989). We contribute
to the literature by employing an instrumental variable approach in order to account for the
endogeneity of the three components of education. Our results indicate that using the
conventional OLS method leads to an under-estimation of the returns to over-education
because of ability bias. It is found that returns to over-education are positive and in fact they
are higher than returns to adequate education, which contradicts previous literature findings.
It is also found that there is a tradeoff between over-education and years of experience.