Fiscal tightening and skills mismatch

Konstantinos Mavrigiannakis, Andreas Vasilatos and Eugenia Vella

European Economic Review, 2025, vol. 174, issue C

Abstract: The paper establishes a new link between fiscal tightening and the vertical skills mismatch rate, defined as the share of over-qualified workers. Using cross-country evidence for Europe, we show that fiscal tightening can increase skills mismatch. We then introduce the latter in a DSGE model with heterogeneous households, capital-skill complementarity (CSC) and labor frictions. We calibrate the model for Greece, where the over-qualification rate exceeds one-third. A fiscal tightening shock raises the mismatch rate in the model, in line also with SVAR analysis. Skills mismatch can act as a buffer for high-skilled workers during recessions induced by tax shocks and is more counter-cyclical when CSC is weak. We also use the model to conduct welfare and policy analyses.

Keywords: Skills mismatch; Over-qualification; Fiscal shocks; Local projections; SVAR; DSGE model (search for similar items in EconPapers)
JEL-codes: E62 F41 J24 J63 O41 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:174:y:2025:i:c:s0014292125000340

DOI: 10.1016/j.euroecorev.2025.104984

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