Human Capital Conversion and Institutional Quality in the European Union

We examine how institutional quality conditions the labor market returns to educational attainment, using individual-level microdata from the fourth round of the Life in Transition Survey across thirteen European Union member states. Linear probability models with country fixed effects show a tertiary employment premium of 12.4 percentage points. Contrary to our initial hypothesis, this premium is larger where institutional trust is lower: a one-point increase on the five-point trust index reduces the premium by 2.6 percentage points, consistent with formal credentials partly substituting for trust-based hiring mechanisms where perceived governance quality is weaker. Two-stage least squares estimates instrumenting tertiary attainment with parental education and childhood book ownership corroborate the baseline gradient, though we interpret them as supportive rather than definitive causal evidence. Tertiary-educated migrants face employment penalties of 4 to 12 percentage points relative to observably similar non-migrants, and 23.8 percent of employed respondents are over-qualified, with the highest incidence in the Baltic states. The findings suggest that educational expansion without parallel investment in credential recognition and institutional upgrading may generate systematic human capital misallocation.