Measures of Labor Use Efficiency from a Cost-Based Dual Representation of the Technology: A Study of Indian Bank Branches

In this paper, we propose a representation of the production technology in the form of a cost set in the output and expenditure space as an alternative to the standard free disposal convex hull of input-output vectors. We show that when all units pay the same input prices, one can construct a free disposal convex hull of outputs and total expenditures to solve the cost minimization problem. We use the proposed model to evaluate the labor use efficiency of a sample of 325 branches of a major Indian public sector bank from four metropolitan cities across two years, 2008 and 2014. This is the first study in the Indian banking context to model the operations of branches using the production approach. Our empirical findings indicate that there is significant inefficiency in labor use in the branches and cost could be curtailed substantially by addressing overstaffing. Across the three types of labor, reducing the expenditure of clerks would have the highest impact for cost saving. We do find, however, that that the extent of overspending on clerks has reduced in 2014, which apparently is a direct consequence of computerization of routine jobs. Efficiency varies across regions. In general, Chennai branches are more efficient than branches from other regions whereas Kolkata branches are the least efficient.