Charting Vocational Education: Impact of Agglomeration Economies on Job–education Mismatch in Indonesia

Job–education matching drives inclusive growth through effective human capital investment. Examination of factors that promote the smooth flow of job-education is crucial in the matching process. We examined how agglomeration affects job-education mismatches among 101,748 employed graduates of vocational secondary schools in Sekolah Menengah Kejuruan (SMK). SMK graduates are the leading cause of unemployment in Indonesia. Data were obtained from the National Labor Force Survey (Sakernas) conducted between 2017 and 2019. This study revealed three different types of job-education mismatches: (1) overeducated workers (level of education exceeds the requirements of their job); (2) horizontally mismatched workers (skills do not align with the job requirements); and (3) workers who are both overeducated and horizontally mismatched, which defines a real mismatch. Employing the job-analysis approach, a 13.58 percent incidence of overeducation and a 61.58 percent incidence of horizontal mismatch among SMK graduates was determined. More than half of these graduates work in jobs where they lack the necessary skills. By assessing the two types of job-education mismatches, we determined that 10.13 percent were real mismatched workers. These workers endured major challenges as they simultaneously suffered horizontal mismatch and overeducation. Dealing with endogeneity and sample selection biases, we showed that agglomeration actively promotes the matching process between occupation and education. Adding 100 workers per square kilometer reduced the probability of overeducation by 0.15 percent, horizontal mismatch by 0.19 percent, and real mismatch by 0.1 percent. Indonesian agglomeration areas outside Java (Mebidangro and Sarbagita) are more effective for reducing risks of overeducation, horizontal and real mismatch than areas in Java (Jabodetabek, Gerbang Kertosusilo and Kedung Sepur). The presence of agglomeration economies correlates with a significant reduction in the job-education mismatch, with varying effects depending on the area..