The impact of underutilization of education on productivity: A case study of the U.S. Bell companies

Abstract

This paper presents an empirical study of the impact of the Underutilization of workers' educational skills (or simply "overeducation") on the production of output of a firm. The study is based on an application of the Tsang-Levin model of production. According to this model, overeducation affects firm output through its influence on worker job satisfaction which is related to firm output. The major hypothesis to be tested is that a firm which does not fully utilize the educational skills of its workers would suffer a loss in output. Using firm-level production data and individual-level data for Bell employees, the study estimated a production function for twenty-two U.S. Bell companies for the period 1981–1982. The study found that overeducation was negatively and significantly related to firm output, thus supporting the major hypothesis. Moreover, the negative impact of overeducation on firm output was quite strong: a one-year increase in overeducation was related to an 8.35% drop in firm output for the Bell companies. The policy implications of the study are discussed and two strategies for reducing this drag on output in the workplace are compared.