CERP3 contributors: Jason Jabbari, Yung Chun, and Xueying Mei
Chun, Yung and Zhang, Guangli and Jabbari, Jason and Mei, Xueying and Zubler, Greg, From Major to Market: Causal Evidence on the Returns to Horizontal Job-Skill Match (September 02, 2025). Available at SSRN: https://ssrn.com/abstract=5433415 or http://dx.doi.org/10.2139/ssrn.5433415
Job-skill mismatch is a pervasive feature of modern labor markets, with large shares of graduates working outside their fields of study and facing substantial wage penalties. While prior studies have documented the prevalence of job-skill mismatch, it’s measurement is prone to error, and causal evidence on its impact and the contexts that shape it remains limited. We address these gaps by developing a continuous measure of horizontal alignment between graduates’ majors and their industries of employment, based on program-to-occupation-to-industry crosswalks and observed employment distributions. To provide causal evidence on horizontal job-skill match on earnings, we estimate two-stage least squares models with individual fixed effects (FE-2SLS), using a Bartik-style shift-share instrument that exploits national industry shocks interacted with local employment structures. Our estimates show that job-skill alignment is strongly rewarded. A ten-percentage point increase in alignment raises annual earnings by nearly 9 percent, an effect magnitude comparable to the widely documented return of an additional year of schooling. Subsample analyses reveal that these effects are concentrated among STEM and manufacturing graduates, bachelor’s and master’s degree holders, women and non-binary workers, and those in tight labor markets.