The return to education and skills in Italy

Purpose – The purpose of this paper is to estimate the incidence of educational mismatch in Italy and the return to investment in education, controlling for employees’ ability. Contrary to most existing studies, the heterogeneity of individual performance is measured directly through the assessment of required and provided skills. Design/methodology/approach – Based on original data including over 3,600 face‐to‐face interviews, this paper appraises the incidence of self‐assessed educational mismatch in the Italian private sector and estimates wage models of the economic returns to educational mismatch, skill requirements and provided skills. Findings – In Italy, under‐educated employees outnumber over‐educated ones and returns to required education and over‐education are lower than in other industrialised countries. Individual heterogeneous ability, as captured by individual skills, is a significant determinant of wage, although the inclusion of direct measures of required and provided skills does not substantially affect the estimated coefficients of the return to investment in education. Practical implications – The omission of controls for the heterogeneous ability of employees biases the results of traditional ordinary least squares (OLS) estimates of wage models. However, the bias may be small enough to make simple OLS estimates on existing cross‐sectional data an acceptable compromise to provide policy makers with reasonably accurate and up‐to‐date information. Originality/value – The paper provides a direct appreciation of individual heterogeneity that other studies can capture only through sophisticated indirect econometric techniques. In addition, the paper extends the set of available cross‐country comparisons by estimating the educational mismatch and the returns to educational and skill mismatches in the overall Italian private labour market.