http://rwe.sciedupress.com Research in World Economy Vol. 10, No. 5; Special Issue, 2019 Published by Sciedu Press 139 ISSN 1923-3981 E-ISSN 1923-399X Regional Economic Growth in Malaysia: Does Aggregate Overqualification Matter? Zainizam Zakariya 1 , Kristinn Hermanssons 2 , Kho Yin Yin 1 & Noor Fazlin Mohamed Noor 3 1 Department of Economics, Faculty of Management and Economics, Sultan Idris Education University, Tanjung Malim, Malaysia 2 School of Education, University of Glasgow, Scotland, United Kingdom 3 Open University Malaysia, Tanjung Malim, Malaysia Correspondence: Zainizam Zakariya, Department of Economics, Faculty of Management and Economics, Sultan Idris Education University, 35900 Tanjung Malim, Perak, Malaysia. E-mail: zainizam@fpe.upsi.edu.my Received: October 10, 2019 Accepted: November 5, 2019 Online Published: December 23, 2019 doi:10.5430/rwe.v10n5p139 URL: https://doi.org/10.5430/rwe.v10n5p139 Abstract This paper explores the impact of aggregate overqualification on regional economic growth in Malaysia from 2005 to 2017 using Dynamic Panel Data (DPD) approach. The aggregate overqualification was gauged as the percentage of workers with at least a bachelor’s degree qualification who employed in an occupation below than the professional job level. Following the method, while the incidence stood at 1 percent, it was however higher in Kuala Lumpur (4.4 percent) and Selangor (3.9 percent) and was much lower in Perak (-0.26 percent) and Perlis (-0.12 percent). Moreover, the incidence was higher after 2010. Empirical findings revealed strong evidence of negative impact of the aggregate overqualification on regional economic growth. Yet, the magnitudes of the effect were smaller, between 0.02 and 0.03. Further analysis revealed the negative impact was greater in most developed states and for the period after 2010. The findings depict that there is a growth penalty for not being fully utilised the knowledge and skills of highly educated workers at the regional labour market. Keywords: aggregate overqualification, regional economic growth, Malaysia JEL codes: I25, J24, O47 1. Introduction In traditional labour market research, it is assumed that workers look for jobs on the global market. However, employment opportunities are mainly determined at the regional level. Due to limited spatial flexibility, most people only look for work on the local market rather than global labour market (Büchel & Battu, 2002; Hensen, de Vries, & Cörvers, 2009; Cabus & Somers, 2018). Job seekers who faced mobility constraint may have at least three options in confronting with a local labour market if no suitable jobs are found – (1) being unemployed; (2) accepting a suitable job further away, beyond the current regional market; or (3) tolerant a local job below their own level of qualification, resulting in overqualification (Pechancová et al., 2019). In this paper, we focus on the last one, i.e. – overqualification at the regional level, i.e.- workers are employed in a job for which their qualifications below than what the jobs require (Frenette, 2000; Mansor, & Ilias, 2013). Assessments of the extent of the effect of overqualification at state level seem crucial for economic policymakers as the incidence is typically resulting in negative rather than positive impacts at the individual and firm-level. (Note 1) This seems to be true in the context of Malaysia as an uneven distribution of economic development across region has led to regional income disparities and unbalanced growth (Yussof & Kasim, 2003; Ragayah, 2008; Abdullah, Doucouliagos, & Manning, 2014; Hutchinson, 2017). Although there have many efforts been implemented, the persistence of regional disparities still exists and it seems a global phenomenon and almost universal (Karimi, Yusop, & Law, 2010; Malaysia, 2016). Differences in human capital endowment, especially education (Ragayah, 2008; Ali & Ahmad, 2009; Karimi, Yusop, & Law, 2010; Kandhro, & Pathrannarakul, 2013) and labour market characteristics such as unemployment, occupation, hours of work or education and skills utilisation (Yussof & Kasim, 2003; Saari, Dietzenbacher, & Los, 2014) are identified as one of the reasons behind the issue. If the supply of highly educated workers is not matched by demand, then the impact of education on economic