This paper examines the incidence and wage effects of over-skilling within the Australian
labour market. It finds that approximately 30 percent of employees believed themselves to be
moderately over-skilled and 11 percent believed themselves to be severely over-skilled. The
incidence of skills mismatch varied little when the sample was split by education. After
controlling for individual and job characteristics as well as the potential bias arising from
individual unobserved heterogeneity, severely over-skilled workers suffer an average wage
penalty of 13.3 percent with the penalty ranging from about 8 percent among vocationally
qualified employees to over 20 percent for graduates.