The Economic ‘Non-Logic’ of Reservation for Locals in Private Sector

The socialist paradise of India doesn’t leave any stone unturned in destroying the businesses and labour market because it believes that it can change the rules of Economics by political maneuvering because such attempts often bring vote. The latest entrant in this field is M L Khattar whose government has brought the law to provide 75% reservation for the locals of Haryana in private sector jobs in organized sector which pay monthly salary up to ₹50,000. Companies will have to provide the demographic data of workers in every 3 months to the government to show that they’re compliant to the new law.

While the Economic illiteracy of BJP leaders is on different plane, what nobody seems to ask is what is the current composition of migrant workers in the work force of Haryana in the sector for which the new law will be applicable. According to 2001 Census, the population of interstate immigrant into Haryana was 14% of the total population which included every type of migration such as migration due to marriage, education etc. However, the share of people migrating for jobs is the highest for interstate migration. I tried finding the data of interstate immigrants in the labour market of Haryana but was unable to find, though there must have been studies around it.

The state government while introducing the bill hasn’t cited the figure to justify that the share of interstate immigrant labour is more than 25% in the category under consideration. Looking at the broad figure which I’ve cited above, it’s quite likely that the percentage is already below 25 and the 75% rule will only increase the cost of businesses while providing political dividends to the government. Coming to the economic rationale of imposing such quota in private sector, there exists none. The government has absolutely no authority to determine on what factors a private firm hires its workers though it’s increasingly being the norm. When the government brings such arbitrary criteria, the labour market has to deal with an additional variable which is completely driven by political consideration. At the firm level, the primary consideration to hire a worker is the skills of the worker and the wage at which he will be ready to work. A company has no reason to discriminate against a person based on his place of birth or residence as it brings no positive economic output for the firm.

What will be the possible consequences of the law? First, the harassment of the businesses by the government will further increase which already have to follow hundreds of regulations under labour laws, environmental laws etc. Control breeds corruption and the companies will try their best to show that they’re compliant even if it means paying the bribery. As the cost of the business increases, the companies which are planning to establish themselves in Haryana will be dissuaded from doing so in the event of added cost. From the hiring perspective, as the pool of available worker shrinks, the companies will be forced to pay higher wages without getting commensurate economic outputs. But there is the catch. A government can impose restrictions of all sorts only when the job exists in the market but when companies shift their base and jobs vanish, who will be under their purview? Simply none and everyone else will be worse off and especially the natives who will be forced to migrate elsewhere.

As the law will apply for organized sector primarily, it also provides incentive for the unorganized sector to remain unorganized lest they’re ready to face another compliance burden. It’s very similar to MSME sector of India where the firms have incentive to remain small, inefficient and less productive as government provides several advantages to businesses in this sector. Business owners typically go for the vertical separation of businesses when they wish to grow to ensure that their old and new corporation will enjoy the same status under MSME instead of making the existing firm grow bigger.

In India, the laws provide incentive to remain economically inefficient and this will be another addition to the list. I had hoped that the governor wouldn’t give assent to the bill but since it has been provided, the saffron socialists open the another path of madness which will be followed soon by many states.

Published by Satish Verma

Read. Contemplate. Write.

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