Abstract:

This study investigates whether performance-related pay (PRP) mitigates the wage penalties associated with educational mismatch in European labour markets, using the 2010 and 2015 waves of the European Working Conditions Survey across 25 EU member states. Within the Overeducated-Required-Undereducated (ORU) framework, the analysis reveals three central findings. First, overeducated workers systematically sort into PRP schemes: each additional year of surplus education increases the probability of holding a performance-based contract by 2.3 to 2.9 percentage points when workers are compared to coworkers in the same occupations. This sorting pattern supports the theoretical prediction that overeducated workers seek performance pay as a signalling mechanism to reveal their latent productivity. Second, despite this strategic sorting, PRP does not effectively buffer workers from mismatch penalties. The wage return to overeducation is fundamentally benchmark-dependent: overeducation carries a persistent penalty of approximately 4.5% per year when workers are compared to similarly educated peers, but generates a premium of 2.0% to 3.5% when compared to coworkers in the same jobs. Third, the analysis uncovers a stark gender dimension. Women face a "double disadvantage": they suffer an overeducation penalty nearly twice that of men (−6.0% versus −3.1% in the peers frame) while capturing a substantially smaller PRP wage premium (6.2% versus 10.1%). Selection-corrected estimates show that PRP does not eliminate women's steeper penalty when compared to similarly educated peers. However, within the same occupations, overeducated women under PRP earn a premium of 5.2% per surplus year—considerably higher than men's 1.7%—suggesting that PRP may help women recover some returns to surplus human capital in within-job comparisons. These findings challenge the view that performance pay serves as a meritocratic "leveller" for workers with surplus skills. Rather than correcting mismatch penalties, PRP appears to reinforce existing structural wage gaps, particularly for women.  

The public research seminars of the Department of Economics and Finance (DEF) at Tallinn University of Technology  usually take place on the second and fourth Wednesdays of the month both in onsite and online format, unless announced otherwise. The seminar will last one hour, presentation will last approximately 45 minutes followed by 15 minutes of discussion. The seminars are held in English. Questions about the seminar can be sent to the seminar coordinator Karsten Staehr karsten.staehr@taltech.ee.