Impact of regulatory reforms on labour efficiency in the Indian and Pakistani commercial banks

Efficiency plays an important role in the operation of firms. If firms are pursing a policy of shareholder wealth maximisation, this implies that maximum efficiency is extracted from a firm’s resources during the production process, or that the minimum quantity of inputs are used to achieve a desired level of output. This is especially true in the case of labour demand and labour usage, as wage expenditure constitutes a significant portion of the average firm’s cost structure. Knowledge of relative inefficiencies in labour usage will therefore be of great interest to firm and, as such, academic studies on efficiency of labour demand in firms have been relatively forthcoming. These include work on the Indian farming industry [Kumbhakar (1996), Swedish social insurance offices [Kumbhakar and Hjalmarsson (1991)], Tunisian Manufacturing [Haouras, et al. (2003) and Kalimantanian rice production [Padoch (1985)]. However, there is relatively little in the way of research conducted on efficiency within the banking sector, and even less on the banking sectors of developing economies [Berger and Humphrey (1997)], despite an increase in research activity in such areas over the last ten years. This is unfortunate, as banks and financial institutions are the most important organisations in overall financial intermediation and economic acceleration of a country, in no small part due to their significant role of converting deposits into productive investment. [Podder and Mamun (2004)]. The process of liberalisation and modernisation is vitally important in this particular case. Because of the unique position that it occupies within the framework of an economy, the banking industry tends to be more heavily regulated and scrutinised than other industries. This trend is particularly apparent in developing economies, where banks tend to exhibit poor performance as a result of overly prohibitive regulation [Kumbakhar and Sarkar (2003)]. Thus, tests of labour demand efficiency can be made more meaningful by including some comparison of efficiency both pre and most modernisation. Not only will this paper seek to make comparisons of labour demand efficiency between India and Pakistan, but will also examine changes in the efficiency of labour demand in both the pre and post deregulation periods.