Monday, March 22, 2010

What does it mean when a million people apply for a thousand jobs?

Several economists have commented on the remarkable and relatively new phenomenon that's seen in India, where a government agency (or a state owned enterprise) advertises (say) 100 job openings and gets a million applications. This is generally interpreted as a problem, as a reflection of the very high extent of unemployment amongst the educated in India.

At the same time, this is hard to reconcile with the picture one gets from private recruiters, who say that it's hard to recruit fairly minimal levels of skills when paying the market price.

The metaphor of market efficiency is useful in thinking about this. Suppose there is a liquid market with many buyers and sellers. Suppose supply and demand clear and the price of the widget is Rs.100. Now suppose you step into the market and offer to buy at Rs.101. In an efficient and well functioning market, you should be deluged with a very large number of sellers trying to sell to you at 1% above the fair market price. Conversely, if you step into the market and try to buy the widget at Rs.99. Nobody should be willing to sell to you at this price. A dramatic shift in the number of bids that you get -- from zero at Rs.99 to a deluge at Rs.101 -- is the hallmark of an efficient market.

I think this is a useful way to think about what is going on with government recruitment. As a thumb rule, researchers like Lant Pritchett and Jeff Hammer believe that in rural India, for junior positions, the government overpays by 3x. Also see Wage differentials between the public and private sectors in India by Elena Glinskaya and Michael Lokshin, in Journal of International Development, 19(3), page 333-355, 2007. Some anecdotes are illuminating:

  • I quit the Ministry of Finance in 2005 and roughly a year later, I bumped into a person who had been my driver while there. He said that he's set himself up to collect the wage of the driver from the government, but has recruited another driver to go to work to do the actual work of driving. He was pocketing a neat profit out of this because the government's price of a driver is roughly 2x the price in the private labour market.
  • Policemen are apparently poorly paid but with ubiquitous corruption and outright shakedowns being run by the police, the true income of a policeman in India is massive. I bumped into a young fellow on the beach in Goa a few weeks ago. He makes a living helping tourists do stretching exercises on the beach. A full 25% of his monthly income is paid to the local policemen as protection money.

Junior clerical staff in PSU banks reap a bonanza because they're overpaid (when compared with the market price of clerical staff) and get job security for life. The NPV of that job is very high.

There is a risk aversion dimension also. People with high risk aversion might particularly favour these public sector jobs because they are both high wage and low risk.

In this environment, when the government advertises for 50 policemen, what do you think would happen? In an efficient market, a large number of suppliers of labour would see that there's an opportunity to sell their services at much, much more than market price. There should be an outright deluge of job applicants.

The phenomenon of a million applicants showing up for a hundred positions is a reflection of civil service wages and job security being way out of line with what is found on the private labour market, and not a reflection of large scale unemployment in India. If anything, a very big deluge of applicants is a reflection of a rational information-rich environment where many individuals are able to access information and act on it.

The price of copper is roughly Rs.350 a kg. If the government put out a tender offering to buy 1000 kg of copper at thrice this price, and if this was an information-rich environment where a large number of suppliers became aware of this high-profit opportunity, then the bids which should show up should be for a million tonnes. This is what we expect in a rational and efficient market. The fact that a million kilos of potential sellers are chasing procurement of a thousand kilos does not in any way suggest that there is excess capacity amongst copper producers.

17 comments:

  1. the junior clerical staff at PSUs get around 8k max. How is that being overpaid? Compare that to a 20k +benefits in stanchart, given that even during one of the worst 2 years of banking stanchart has only fired less than 0.25% of workforce.The facts are available on IBA's report on clerical front-end staff.

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  2. Why would the Indian government want to overpay for labor if it can get it for so much less?

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  3. Anonymous, Ajay talks about NPV of a govt. clerical job with lifelong job security, assured promotions, medical and pension benefits

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  4. Mariusz Skonieczny question is a pertinent one. Why should the govt. pay higher salary at the lower level.

    would not, say, expanding NREGA, bringgreater political milage?

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  5. well never mind efficient market hypothesis. dont you think comparatively higher salaries would draw efficient employees, following the efficient worker hypothesis?
    Ideally this should screen in the best talent for that grade of labour.
    Unfortunately these are non-profit government roles, where meritocracy isnt always endorsed...

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  6. I think we should divide the job market on a 2by 2 matrix. lets take an example of a clerk in a bank. On x axis we have low paying and high paying and on y axis we have low skill and high skil. The clerk at Stanc falls in the quadrant of high pay and high skill. And a clerk post in PSB may fall under Low Skill and Low Income. I think the point vbeing made is that govt is not paying higher wages. rather, govt pays less wages and thus attracts lower skilled people and since less skilled out number high skilles thus govt gets higher number of applications. However there may be one more phenomemon and which is skill adjusted pay :). Now what may also be hapenning is Govt may be paying more for / unit of skill but has cap on the salary. So it does not incentivises a person with high skill to go to govt, where as a person with less skill is paid better by Govt.

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  7. On a completely technical note, even a risk-neutral person would prefer a job with lower risk and higher pay....only a risk-loving individual might bemoan the lack of risk.

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  8. This is a very personal reaction, I am ok, if this comment is deleted from this post or Ajay does not approve it.
    -----
    I am officer working in a Private Bank and my wife is a clerk working in a Public sector bank.
    In majority of new branches of PSB's there is only one clerk who has to manage cash and attend to other routine matters.
    The single clerks will be holding the Cash keys, and hence, are not able to take emergency leave too.

    I am in hyderabad for the last one year, and my wife is in bangalore during the same time. The PSB bank is unable to find a replacement for my wife, hence, she is not being transferred to hyderabad.
    Imagine, the situation in smaller places, where the staff position is still horrible
    And, in PSB's the IT infrastructure too is not great.

    As I said earlier, this is my personal opinion only, based on my personal experience

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  9. On a completely technical note, even a risk-neutral person would prefer a job with lower risk and higher pay....only a risk-loving individual might bemoan the lack of risk.

    I just meant that over and above the simple comparison of the expected income (as a few authors have done) one has to also factor in the job security that government offers - that near certain promotion and wage hike that comes along anyway.

    If all humans have the same preferences: this dimension means that the attraction of the government job is greater than meets the eye.

    If humans have a range of curvature: there will be a selection bias where people with more risk aversion will tend to take the government job (other things being equal).

    But other things are not equal. People know themselves best. Perhaps the ones who have the least optimism about how they will fare in a private sector wage trajectory (high risk, more meritocracy) are more likely to opt into the public sector wage trajectory (low risk, low meritocracy).

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  10. Any of you can correct me if I am wrong.

    I agree with most of what has been said. I want to add a few more dimensions. An earlier blog here had talked about the lack of professional management in large parts of the private sector. A government job offers an escape from a life of a semi-servant to a business family. This is something that has been brought up by many Indians who would rather work for an MNC than an Indian company. That will add to the NPV of a government job.

    I don't think the government overpays as much as the employees find ways to supplement their meagre incomes. I have know quite a few children of honest government employees who have struggled for money. The NPV of a government job was never much for them.

    NREGA would be great but it will not keep the Indian middle class at bay. That's why we used to invest quite a bit in higher education while our primary school system in rural areas rotted to its core. Things might have changed now and I hope they did.

    Also, I think government jobs are popular in certain parts of the country probably because of cultural factors. Someone who is from the Hindi belt with poor skills in the English language has a better chance of landing a government job than a job in an MNC. I could be wrong about this though because I don't have recent knowledge.

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  11. In India, government overpays at the junior levels and underpays at the senior levels. Depending on the kind of people that you encounter, the phenomena that you see with your own eyes could differ dramatically.

    We underpay the joint secretary by a factor of 3x and we overpay the driver by a factor of 3x.

    In the labour market, multinational firms as employers are but a tiny proportion of the labour market. The vast fraction of the labour market is Indian private.

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  12. I agree with your logic but families of honest people in junior levels of the government do struggle. It should be worse in the private sector. The lack of talent that private recruiters talk about must be for more skilled positions.

    I see the government and the MNCs as good examples for the market in their own ways. Good examples of providing a living wage and professional management respectively.
    PS: I remember a very old blog of yours. I agreed with your comment about pay differentials between senior and junior levels (at one point of time, the driver and the department secretary were earning almost the same wage once DA was added). But IAS officers can always find a better paying job in the private sector if money is what they are after.

    Thank you for hosting my comments.

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  13. Ajay said,

    'In India, government overpays at the junior levels and underpays at the senior levels. Depending on the kind of people that you encounter, the phenomena that you see with your own eyes could differ dramatically.'

    But y does the govt have a structure like that. As I mentioned earlier does not expanding the largesse on more people thru NREGA bring better electoral dividends. Is not the economics in favour of reducing the benefit to the select few lower level govt employees and increasing it too a larger audience. Am I missing something here.

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  14. I think you are looking at single dimesion of whole issue under assumptions that every citizen of India has access to good education. In private sector, you should have MBA or CA or some professional degrees from A, B, C, grade insti. The students from 3rd or 4th tier cities or village or from low income group do not have enough resources to get admission in MBA. Private sectors do not reach out these section of society, as they do campus recuirtement. Hence they do not have choice, but to apply for government job. Atleast government advertise for these jobs and do not discriminate on the basis of whether you have studied in Metro or Village. Most of the private sectors are filled through HR agency. It is almost like black market of skill demand and supply. Hence everything is not fine with private sector and everything is bad in government sector.

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  15. The driver anecdote reminds me of a classic arbitrage position, except that acting on it is not doing anything to drive away the arbitrage situation as would happen in an efficient market.

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  16. Yunhi, the cliched saying also applies: the market can remain irrational longer than one can remain solvent (alive in this case).

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  17. About the argument that why will government like to supply money through overpaying jobs..rather than programmes like NREGA..
    Overpaying at lower level government jobs is not a recent phenomenon..It pre-dates NREGA, when this was a very effective and one of the only very few mechanisms to pump some additional money in the lower end of the economy.

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