Govt’s high salaries are fuelling unemployment: ‘No money to hire more’

Development economist Karthik Muralidharan has said that India’s public sector suffers from extreme wage distortion, with 95% of government jobs paying five times more than market rates, while top-level decision-makers remain vastly underpaid.

“This is the central problem – the wage compression in the public sector,” said Muralidharan, who currently serves as a Professor of Economics at the University of California. “The top 1 or 2% of people – who are taking decisions that are way more complex than most CEOs take – are massively underpaid relative to what the market would pay for those skills. But for 95% of government jobs, you’re paying five times more than what the market pays.”

Muralidharan was responding to a question on India’s distorted jobs pyramid, citing examples like Uttar Pradesh, where 2.3 million people – including PhDs – applied for 368 peon jobs, driven by the lure of high salary and low work expectations.

According to him, this wage imbalance produces four major systemic distortions. First, it prevents hiring at scale. “Econ 101 will say that I need to pay less and hire more,” he said during a podcast conversation with Monika Halan for Groww. “But all the money goes into paying the few existing people, so you don’t have money to hire.”

He cited a study from Tamil Nadu where hiring additional Aanganwadi workers at Rs 4,000–Rs 5,000 per month had dramatic effects. “We still found dramatic positive improvements in learning outcomes and reduction in malnutrition,” he said. “The long-term ROI of doing this is about 2,000% – it’s a 20x ROI.”

In contrast, his paper titled Double for Nothing showed that doubling the pay of existing workers had “absolutely no impact”.

The second distortion is that the lucrativeness of these jobs makes recruitment unmanageable. “You get like 100x the number of applicants,” he said. “So running the recruitment itself becomes so difficult that instead of having an orderly annual process, you run it once in three, four, five years.”

Even military-grade security isn’t enough to prevent scandals, he said, citing states like Bihar and Jharkhand. “Because the stakes of the paper leak is so high, you paralyze your system by paying so much above the market.”

The third problem, he said, is misaligned interest. “You have people saying I’ll apply for forest guard, I’ll apply for teacher, I’ll apply for peon,” he said. “The person who gets selected often has no interest in that sector – they’ve just applied for every possible lottery.”

And the fourth, and most overlooked, is the unemployment trap created by government exam preparation. “Even in a fast-growing state like Tamil Nadu, 80% of all unemployment of educated youth is estimated to be because they’re writing government exam after government exam,” he said. “If you look at the opportunity cost in terms of lost time – it’s often thousands of person-years for every person who is hired.”

This dynamic also undermines skilling, he said. “The most lucrative employer in the economy doesn’t care about skills. It only cares about passing exams,” he explained. “You’ve built an entire education system – ratta maar maar ke, jugaad kar ke exam pass ho jaata hai – but people drop out of skilling programs because who wants to do the hard work of being accountable?”

Muralidharan rejected the narrative that private sector job creation is the problem. “The private sector creates jobs – but at market wages,” he said. “It’s the public sector that is out of whack with market realities.”

As a way forward, he proposed revamping recruitment for frontline roles – especially in teaching, nursing, and policing – through practicum-based training. “After 12th, you join a practicum-based nurse or teacher training program – three months of theory and nine months of practice,” he said. “At the end of four years, for regular government recruitment, you start giving extra points for people who have worked in that sector.”

This, he said, would shift the model from a “generic lottery” to one that rewards interest, experience, and real capability.