Rent-seeking and exams in India’s public sector exams.
In India, government jobs pay far more than equivalent jobs in the private sector—so much so that the entire labor market and educational system have become grossly distorted by rent-seeking to obtain these jobs. Teachers in the public sector, for example, are paid at least five times more than in the private sector. It’s not just the salary. When accounting for lifetime tenure, generous perks, and potentially remunerative possibilities for corruption, a government job’s total value can be up to 10 times that of an equivalent private sector job. (See also here.)
As a result, it’s not uncommon for thousands of people to apply for every government job—a ratio far higher than in the private sector. In one famous example, 2.3 million people submitted applications for 368 “office boy” positions in Uttar Pradesh.
The consequences of this intense competition for government jobs are severe. First, as Karthik Muralildharan argues, the Indian government can’t afford to pay for all the workers it needs. India has all the laws of, say, the United States, but about one-fifth the number of government workers per capita, leading to low state capacity.
But there is a second problem which may be even more serious. Competition to obtain government jobs wastes tremendous amounts of resources and distorts the labor and educational market.
If jobs were allocated randomly, applications would be like lottery tickets, with few social costs. Government jobs, however, are often allocated by exam performance. Thus, obtaining a government job requires an “investment” in exam preparation. Many young people spend years out of the workforce studying for exams that, for nearly all of them, will yield nothing. In Tamil Nadu alone, between one to two million people apply annually for government jobs, but far fewer than 1% are hired. Despite the long odds, the rewards are so large that applicants leave the workforce to compete. Kunal Mangal estimates that around 80% of the unemployed in Tamil Nadu are studying for government exams.
Classical rent-seeking logic predicts full dissipation: if a prize is worth a certain amount, rational individuals will collectively spend resources up to that amount attempting to win it. When the prize is a government job, the “spending” is not cash, but years of a young person’s productive life. Mangal calculates that the total opportunity cost (time out of the workforce) that job applicants “spend” in Tamil Nadu is worth more than the combined lifetime salaries of the available jobs (recall that jobs are worth more than salaries, so this is consistent with theory). Simply put, for every ₹100 the government spends on salaries, Indian society burns ₹168 in a collective effort of rent-seeking just to decide who gets them.
The winners are happy but the loss to Indian society—of unemployed young, educated workers who do nothing but study for government exams—is in the billions. Indeed, India spends about 3.86% of GDP on state salaries (27% of state revenues times 14.3% of GDP). If we take Mangal’s numbers from Tamil Nadu, a conservative (multiplier of 1 instead of 1.68) back-of-the-envelope estimate suggests that India could be wasting on the order of 1.4% of GDP annually on rent-seeking. (Multiply 3.86% of GDP by 15 (30 years at 5% discount) to get lifetime value, and take 0.025 as annual worker turnover.) Take this with a grain of salt, but regardless, the number is large.
India’s most educated young people—precisely those it needs in the workforce—are devoting years of their lives cramming for government exams instead of working productively. These exams cultivate no real-world skills; they are pure sorting mechanisms, not tools of human capital development. But beyond the staggering economic waste, there is a deeper, more corrosive human cost.
As Rajagopalan and I have argued, India suffers from premature imitation. In this case, India is producing Western-educated youth without the economic structure to employ them. In one survey, 88% of grade 12 students preferred a government job to a private sector job. But these jobs do not and cannot exist in the numbers demanded. The result is disillusioned cohorts trained to expect a middle-class, white-collar lifestyle, convinced that only a government job can deliver it. India is thus creating large numbers of educated young people who are inevitably disillusioned. That is not a sustainable equilibrium.
Mangal valiantly proposes redesigning the exams to reduce waste, but this skirts the core issue: India’s wildly skewed public wage structure. Government salaries far exceed what is justified by GDP per capita or job requirements, distorting education, employment, and unemployment throughout the entire economy in deeply wasteful ways. The only real solution is to bring public sector pay back in line with economic fundamentals.
