We build a model to understand educational mismatch and earnings inequality among highly educated workers. Educational mismatch has a negative wage effect and a positive correlation with wage inequality, for occupuations and college majors. To disentangle different reasons or channels that contribute to wage inequality, we identity the three underlying reasons behind the mismatich-preference, promotion, and search friction-and quantify their impacts. Quantitatively, the preference and promotion channel negatively contribute to an inequality increase from 1990 to 2000; the match premium contributes to a 28.4% increase in inequality; and the contribution of search friction is 5.3%. We conclude that educational mismatch affects earnings inequality significantly and that the impact varies based on the underlying reasons. The study has important policy implications in that it shows that wage inequality can be reduced by policies for improving the education match rate and educational signaling and lowering market friction
