The long-run costs of highly competitive exams for government jobs

Public sector recruitment exams can be highly competitive. Does this competition encourage candidates to develop generalizable skills, or do investments in exam preparation burden candidates who fail to get selected? I address this question by studying the impact of a partial public sector hiring freeze in the state of Tamil Nadu, India on male college graduates. The hiring freeze eliminated 86% of the usual vacancies. This increased the applicant-to-vacancy ratio for the remaining posts. Cohorts that were exposed to the hiring freeze delayed full-time employment, most likely in order to invest more time in exam preparation. A decade after the hiring freeze ended, the affected cohorts demonstrate a lower earning capacity, have delayed household formation, and appear more likely to remain unemployed. Together, these results suggest that highly competitive exams encourage candidates to make investments that are ultimately unproductive.