Wage Returns to Vertical Mismatch: Signaling, Human Capital, and Assignment Mechanisms in the Labor Market

This research analyzes the development paradox in D.I. Yogyakarta, where abundant high educational attainment does not linearly correlate with competitive average wage levels. This phenomenon indicates labor market inefficiencies caused by vertical mismatch. Using multiple linear regression on 4,072 observations, this study examines the impact of overeducation and undereducation on wages through the dual mechanisms of the formal and informal sectors. The findings reveal that overeducated workers in the informal sector receive a significant wage premium of 15.60%, confirming the Signaling Theory. However, this premium is reduced to only 3.06% in the formal sector due to structural job rigidity (Assignment Theory). Meanwhile, undereducated workers consistently earn a premium of 15.46%, driven by the accumulation of practical human capital through long-term work experience. In conclusion, the low average wages in D.I. Yogyakarta stem from the low absorptive capacity of the local economy, which fails to optimally allocate educated labor into productive positions. This research recommends economic diversification and enhancing job flexibility to maximize the returns on human capital investment.