STYLIZED FACTS VS EVIDENCE; THE REPERCUSSIONS OF HUMAN CAPITAL MISMATCH ON INCOME INEQUALITY IN PAKISTAN

Abstract

This paper examines the impact of human capital mismatch on earnings inequality in Pakistan and compares the evidence to test its conformity to the widely observed stylized facts.

Human capital mismatch in the labor market is represented by job specific earnings differences between over, under and adequately educated persons. Three main methods are generally used to measure the mismatch including workers’ self-assessment, job analysis and realized method. Present study uses the realized method to measure the over, under and adequate education levels from the given set of data thus being more representative of the in-focus job market.

Using Duncan and Hofmann variation of the Mincerian earnings function and a transformed dataset from Household Integrated Income and Consumption Survey, the paper confirms existence of earnings disparities due to human capital mismatch in Pakistan. Empirical results mostly conform to the stylized facts about pattern of mismatch and earning differences.