Mismatch matters: education and productivity in laggard and frontier firms

Abstract This research aims to study the relationship between educational mismatch and firm-level labor productivity in a country marked by low productivity growth and rising education-occupation mismatches. We explore a rich matched employer-employee data set from Portugal over the 2010–2019 period that merges staff logs with firm-level financial statements. Our analysis accounts for a wide range of observed and time-invariant unobserved characteristics at the firm and worker level. We partially isolate the effects of overeducation and undereducation and estimate their impacts at the mean and across the productivity distribution. Results show that undereducation is consistently detrimental to firm productivity, while overeducation has a positive but limited effect. Firms could achieve greater productivity gains by aligning overeducated workers with occupations that better match their qualifications. Although part of the observed relationship reflects firm-level selection, where more productive firms attract more educated workers, we find that internal decisions on how firms manage and allocate workers’ qualifications also play a crucial role. Moreover, more productive firms are better at leveraging the capabilities of overeducated workers.