http://www.epw.org.in/showArticles.php?root=2005&leaf=02&filename=8323&filetype=html
EPW Reservation Controversy February 26, 2005 Reservation and Efficiency Myth and Reality The corporate sector needs to keep in mind that anti-discrimination measures like reservation are needed for growth as much as equity. It is necessary to emphasise that anti-discrimination policies will not only provide fair and non-discriminatory access to historically excluded and discriminated groups like the dalits, but simultaneously remove constraints imposed by caste discrimination on labour markets, and thereby induce competitiveness and economic growth. Sukhadeo Thorat The proposal to extend job reservations for discriminated groups to the private sector has not found favour with corporate industry and some academics. This note argues that such opposition goes against the grain of theoretical and empirical studies in current economics, both of which support the view that affirmative action for excluded groups serves to improve rather than impair efficiency in private industry. It has to be remembered at the outset that the private sector in India has been excluded from the purview of reservation policies ever since the 1950s. The justification for this was the supposedly negative impact of reservation/affirmative action policies on competitiveness and productive efficiency. Private industry also argues that its recruitment methods are fair and that anti-discrimination measures are therefore unwarranted. Despite the various shades of opinion, one is struck by the fact that while the corporate sector invokes the neo-classical economic paradigm in support of liberalisation, it chooses to disregard the insights on anti-discrimination policies offered by the same paradigm. It is therefore necessary to examine the theoretical and empirical basis of arguments about the alleged linkages between reservation and economic efficiency. Standard neo-classical theories of discrimination in general, and those of caste discrimination in particular, state that labour market discrimination creates massive inefficiencies in the allocation of labour, reduces competitiveness and hampers economic growth. Neo-classical theories also recommend that anti-discrimination policies like reservation/affirmative action and other types of market intervention be used to promote growth and ensure fair access to jobs for discriminated groups. Discrimination and Efficiency The current theoretical literature on market discrimination and efficiency linkages addresses two inter-related issues. First, it looks at the effects of market discrimination on profit, wages, and efficiency in the allocation of labour. Second, it assesses the impact of different types of reservation/affirmative action policies on productive efficiency, particularly that of the employees recruited under such policies. Standard neo-classical economic theories argue that a perfectly competitive market situation is necessary for efficient and optimum economic outcomes in any economy, and that any deviation towards imperfection produces inefficiency and sub-optimal economic outcomes. Market discrimination induces imperfections in the labour and other markets through a kind of market failure, generates less than optimum economic outcomes, and thus hampers economic growth, besides of course creating unequal opportunities for discriminated groups. In a World Bank study, Birdsall and Sabot have summarised the central insights of standard neo-classical theory on discrimination: In sum, discrimination will tend to slow economic growth by reducing efficiency in the allocation of labour among firms and the economy by reducing the job commitment and efforts of workers who perceive themselves to be victims of injustice, and by reducing the magnitude of investments in human capital, and the return on those investments. The losses due to discrimination are likely to be greater, the more rapid the pace of change in an economy. The standard economic theories of caste also predict the same consequences for caste discrimination, which forms the basis for reservation policy in India. These theories uniformly recognise that the caste system�s basic feature of assigning occupations by caste implies the exclusion of each caste from the occupations assigned to other castes. Exclusion and discrimination in occupations and labour employment are thus internal to the system and a necessary outcome of its economics. It is reasonable to assume that in a market economy framework, occupational immobility would operate through restrictions in various markets such as labour, land, credit, and other inputs and services necessary in any economic activity. Labour market exclusion would therefore manifest itself in exclusion from employment in another caste�s occupation and/or in �unfavourable inclusion� (to borrow the term used by Amartya Sen), meaning access to employment in another caste�s occupation but with unequal treatment in terms of wage rates and conditions of work. Immobility of labour and capital in a caste-divided society essentially implies occupationally segmented, and imperfectly mobile labour and capital markets, which would generate sub-optimal economic outcomes and hamper overall economic growth. In its ultimate outcome, the economic efficiency of the caste-segregated economy would be lower than that posited in the model of a perfectly competitive market. Caste segregation has other consequences to which Ambedkar draws our attention. The efficiency of labour is adversely affected by customs and perceptions regarding the dignity of labour and the unequal social status ascribed to different occupations. In a caste-divided society, the choice of occupation is not based on individual preferences or capabilities, but is decided by birth in a particular caste. However, while some occupations (and castes) are valued by society, others are devalued and are considered polluting, impure, and therefore socially degrading. The social stigma of impurity and pollution attached to occupations such as scavenging and leather-making reduces the social status of the persons engaged in them. Workers who are forced into these occupations on account of their caste origin do not derive job satisfaction and are constantly prone to aversion, ill will, and the desire to malinger. In this context Ambedkar observed that: There are many occupations in India which, on account of the fact that they are regarded as degraded by Hindus, provoke those who are engaged in [them]. There is a constant desire to evade and escape from such occupations which arises solely because of the blighting effect which they produce upon those who follow them owing to the slight and stigma cast on them by the Hindu religion�What efficiency can there be in a system under which neither men�s hearts nor their minds are in their work? Ambedkar and the economist Akerlof have also pointed to the adverse consequences of caste divisions on employment. By putting restrictions on inter-caste mobility of labour and thereby preventing market readjustment of employment, caste becomes a direct cause of much of �voluntary unemployment� among high caste persons and �involuntary unemployment� among the low castes. The high caste Hindus would generally prefer to be voluntarily unemployed for some time rather than take up an occupation considered to be beneath their caste status. On the other hand, for the low castes and specially the untouchables, the restrictions on their entering occupations assigned to other castes compel them to remain involuntarily unemployed. Reservation/Affirmative Action and Efficiency Besides its alleged adverse impact on overall efficiency, private industry also points to the possible negative consequences of the methods used to ensure fair access to employment for discriminated groups. It is argued that relaxations in qualifications for appointment may hamper the productivity of firms by forcing them to hire incompetent workers. However, as with the overall efficiency argument, there is little support for this view in economic theory and in the empirical literature on discrimination. The fallacy of the argument becomes evident when one considers the fact that recruitment under reservation in the public sector in India and elsewhere rarely involves the alteration of minimum norms of eligibility. Therefore, the question of compromising on productive efficiency does not arise. However, some firms do take steps to guard against possible problems by initiating proper screening and orientation before recruitment and, later, through on-the-job-training of affirmative action employees. But the main problem is that there is no empirical evidence on this issue. There seem to be no studies available on the relative efficiency of workers recruited under affirmative action and other workers, whether in India or elsewhere. It is therefore difficult to disagree with Holzer and Neumark, who conclude their comprehensive review of theoretical models of efficiency and the impact of various types of affirmative actions in the US with the observation: The potential effects of Affirmative Action on performance, at least in the labour market, appear to depend heavily on how it is implemented. Employers who practise Affirmative Action can (and often do) mitigate its potentially negative effects on performances by screening before workers are hired, as well special training and evaluation efforts afterwards. Industry and Discrimination in Labour Market The corporate sector also argues against reservation policy on the grounds that it follows fair methods of employment, and hence there is no need for any anti-discrimination measures. However, this argument is completely contrary to the conclusions of studies on the working of Indian industrial labour markets. There is considerable evidence to show that the private sector follows recruitment methods which are exclusionary and discriminatory. In order that the best candidates may be hired, all potential candidates must have equal access to information about job opportunities and to the channels and processes of hiring. Scholars like T S Papola, who have studied the industrial labour market in India, have observed that the various modes and mechanisms of employment used by private sector industry have involved social exclusion and discrimination throughout the period of modern industrial development. Both the jobber system used by the factory system in the initial period and the institution of labour contractor/officer which replaced it, turned out to be equally exclusionary and particularistic in their nature and outcomes. The National Employment Service (NES) was the next mechanism, and is considered to be less inequitable and discriminatory in nature. But the use of NES by industry has declined over time. During 1949-53, between 50 and 85 per cent vacancies notified by employers were filled by registrants of employment exchanges. The figure went down to 65 per cent during 1953-60, and stayed at around 60 per cent during 1960-68. During the 1980s the ratio has been steady at around 55 per cent. Studies further revealed that private factories and enterprises do not use NES for recruitment in any significant way. Papola provides us with a review of some of the studies done between 1957 and 1986-87. Among the workers surveyed in different centres at different points of time during this period, those recruited through employment exchanges formed about 2.2 per cent in Pune (1957), 1.87 per cent in Ahmedabad (1971/72), 1.5 per cent in Mumbai (1975/76), and 10.6 per cent in Coimbatore (1986/87). Thus, the only institutional mechanism for ensuring a fair and non-discriminatory process of recruitment has hardly been used by private employers. On the other hand, informal channels of recruitment have been employed by private industry on a large scale. The above mentioned studies also offer figures on the extent of recruitment through informal and personalised channels, which was more than 70 per cent in Pune (1959), and around 60 per cent in Mumbai (1976), Ahmedabad (1975), Coimbatore (1986/87) and Surat (1998). Thus it is evident that a very high percentage of workers in private industry got jobs through personalised and insider-based recruitment processes. Papola notes that the social composition of these insider groups is likely to be tilted towards the socially better-endowed sections of society. For instance, in Pune factories higher castes like brahmins and marathas are over represented, accounting for 50 per cent of the workforce, as against a 35 per cent share in population. In Coimbatore, 49 per cent of brahmins were in secure jobs as against 23 per cent of backward castes, and 30 per cent of scheduled castes. In their study based on a field survey of urban areas, Banerjee and Knight observed: There is indeed discrimination by caste, particularly job discrimination � discrimination is greatest in operative jobs, in which contacts are more important for recruitment, compared with white-collar jobs in which recruitment involves formal methods. A number of other studies have also brought out evidence on the influence of caste status on occupations in Indian urban centres, and the discriminatory working of the private sector labour market in India. Free Market vs Interventionist Approach Economic theories of caste imply that restrictions on labour mobility create huge imperfections and inefficiencies in the competitive allocation of labour, and produce less than optimum economic outcomes, besides denying fair access to the discriminated groups. Two kinds of remedies against discrimination flow from these theories. The standard neo-classical theory predicts that in a highly competitive labour market, discrimination will prove to be a transitory phenomenon. Therefore, this approach implies that the market is self-correcting and advocates a non-interventionist policy approach to overcome market discriminations. However, there are several reasons why labour market discrimination might persist over a long period. First, even the presence of perfect competition in all markets is not a sufficient condition for elimination of discrimination if all employers are discriminators, which is likely to be the case in Indian labour markets. Secondly, most markets are anyway not highly competitive. Birdsall and Sabot�s World Bank study attests to the persistence over decades of labour market discrimination in high-income countries. Moreover, in developing countries like India, most of private industry operates under monopolistic and oligopolistic markets, which provide ample scope for discrimination in hiring. Therefore, in order to remove the constraints on labour mobility and to improve its allocative efficiency, market interventions in the form of reservation or affirmative action policies are inevitable. Thus, quite apart from equity considerations, anti-discriminatory interventions in the labour and other markets are needed for ensuring efficiency, improving market competitiveness, and streamlining the performance of the labour market and economy. They will also have the added advantage of providing fairer access to jobs for discriminated groups. The corporate sector has, however, completely ignored these policy insights from economic theory and has suggested alternative policies of its own. Though some from the corporate sector do recognise the need for measures to compensate discriminated groups, they favour alternative policies focusing solely on education, skill development and favourable access to capital. But these solutions ignore the twin problems of market failure associated with caste-based labour market discrimination, and lack of fair access to jobs for the discriminated groups. In other words, they offer the general solution of education and skill development for a problem which requires a specific solution. They also fail to recognise that the disadvantages of discriminated groups like untouchables arise from two different causes � namely, economic and educational backwardness due to denial of opportunity in the past, but also continuing exclusion and discrimination in hiring in the present � and that they therefore require a twofold solution. Like the educationally backward sections of the higher castes, the lower castes also require education and skill development. But unlike these underprivileged members of the upper castes, the lower castes and specially the untouchables require additional safeguards to ensure fair access to employment and education. Education alone will not help, unless it is supplemented by strategies for enforcing fair access to jobs. It is not a coincidence that in a large number of countries in the world, policies for the economic and educational empowerment of discriminated groups are supplemented by reservation/affirmative action policies to ensure that they get a fair share not only of employment and education, but also of capital, agricultural land, and political representation. Thus, the corporate sector needs to keep in mind that anti-discrimination measures like reservation are needed for growth as much as equity. It is necessary to emphasise that anti-discrimination policies will not only provide fair and non-discriminatory access to historically excluded and discriminated groups like the untouchables, but will simultaneously remove constraints imposed by caste discrimination on labour markets, and thereby induce competitiveness and economic growth. Email: [EMAIL PROTECTED] References Akerlof, George (1980): �The Theory of Social Customs, of Which Unemployment May Be One Consequence�, Quarterly Journal of Economics, XCIV-4, June 1980. Ambedkar, B R (1971 edition): Annihilation of Caste in Vasant Moon (ed) Dr Babasaheb Ambedkar Writings and Speeches, Vol 1, Education Department, government of Maharashtra. Banerjee, Biswajit (1991): �Job Discrimination and Untouchability� in Unfair Advantage: Labour Market Discrimination in Developing Countries, World Bank, Regional and Sectoral Studies. Holzer, Harry and David Neumark (1999): �Assessing Affirmative Action�, National Bureau of Economic Research, August, working paper 7323. Papola, T S (2004): �Social Exlcusion and Discrimination in Hiring Practices: The Case of Indian Private Industry�, paper presented in a Seminar on Remedies against Discrimination and Reservation in Private Sector, July, Delhi. ------------------------ Yahoo! Groups Sponsor --------------------~--> DonorsChoose. A simple way to provide underprivileged children resources often lacking in public schools. Fund a student project in NYC/NC today! http://us.click.yahoo.com/5F6XtA/.WnJAA/E2hLAA/1dTolB/TM --------------------------------------------------------------------~-> �������������������������������������������������������� This is ZESTCaste whose members watch India's painful journey to society's de-casteisation. Members are encouraged to post messages to [email protected] If you got this mail as a forward, subscribe to ZESTCaste by sending a blank mail to [EMAIL PROTECTED] OR, if you have a Yahoo! ID, by visiting http://groups.yahoo.com/group/ZESTCaste/join Get all ZESTCaste mails sent out in a span of 24 hours in a single mail. Subscribe to the daily digest version by sending a blank mail to [EMAIL PROTECTED], OR, if you have a Yahoo! Id, change your settings at http://groups.yahoo.com/group/ZESTCaste/join ==theZESTcommunity====================================== [1] ZESTCurrent: http://groups.yahoo.com/group/ZESTCurrent/ [2] ZESTEconomics: http://groups.yahoo.com/group/ZESTEconomics/ [3] ZESTGlobal: http://groups.yahoo.com/group/ZESTGlobal/ [4] ZESTMedia: http://groups.yahoo.com/group/ZESTMedia/ [5] ZESTPoets: http://groups.yahoo.com/group/ZESTPoets/ [6] ZESTCaste: http://groups.yahoo.com/group/ZESTCaste/ [7] ZESTAlternative: http://groups.yahoo.com/group/ZESTAlternative/ [8] TalkZEST: http://groups.yahoo.com/group/TalkZEST/ Yahoo! Groups Links <*> To visit your group on the web, go to: http://groups.yahoo.com/group/ZESTCaste/ <*> To unsubscribe from this group, send an email to: [EMAIL PROTECTED] <*> Your use of Yahoo! Groups is subject to: http://docs.yahoo.com/info/terms/
