In this paper, we analyze the negative impacts of overeducation on wages in the Japanese youth labor market. In addition, this study assesses empirically the validity of the Human Capital Theory and Job Competition Model within the context of overeducation and undereducation. Our study uses the data set of a web monitoring survey targeting Japanese youth aged 17 to 27; the survey was conducted in January 2012 by the Economic and Social Research Institute, Cabinet Office. The increasing trend of youth to enroll for longer educational courses and the relative scarcity of suitable job opportunities later results in overeducation. Overeducation is the mismatch that an individual has higher qualifications than required for their current jobs. This phenomenon leads to various negative outcomes. As expected, there is a negative relationship between overeducation and wages. Overeducated workers earn significantly lesser than their correctly placed colleagues, after controlling for ability and other potential bias. The occupational structure of the Japanese youth labor market lacks the capacity to absorb the rising number of educated workers into traditional occupations. Conversely, undereducated employees earn more than youth in jobs exactly matched to their qualifications. In terms of a theoretical framework, our findings imply that the Human Capital Theory is not valid within the context of overeducation and undereducation in the Japanese youth labor market.
