Preferential Employment Policies and Firm Performance: Evidence from Indian Public Sector Enterprises

Abstract

We examine the impact of job reservations on the performance of public sector enterprises (PSEs) in India. We hypothesize that reservation benefits firm performance if implemented across all levels of the employment hierarchy. We rely on data for all manufacturing central government‐owned PSEs from 2014 to 2017 and employ instrument variable estimation strategies to analyze the effects. Using ministry level employee composition aggregates and the share of inputs procured from the micro, small and medium enterprises (MSME) sector as our instruments, we find that adhering to reservation norms across a firm's organizational hierarchy enhances firm performance. This validates our main hypothesis that a diverse workforce at every level is associated with a better working environment, larger information flow and harmonious labor relations that consequently improve performance. However, the Indian PSE experience documents that the reserved category representation is disproportionately skewed towards the lower end of the organizational hierarchy. An in‐depth analysis of policy documents and committee reports suggests systematic limitations in vacancy notifications and discriminatory practices within the organization as the main drivers of this skewed representation.