Short-Term Effects of India's Employment Guarantee Program on Labor Markets and Agricultural Productivity

Abstract

This paper uses a large national household panel from 1999/2000 and 2007/08 to analyze the short-term effects of India's Mahatma Gandhi National Rural Employment Guarantee Scheme on wages, labor supply, agricultural labor use, and productivity. The scheme prompted a 10-point wage increase and higher labor supply to nonagricultural casual work and agricultural self-employment. Program-induced drops in hired labor demand were more than outweighed by more intensive use of family labor, machinery, fertilizer, and diversification to crops with higher risk-return profiles, especially by small farmers. Although the aggregate productivity effects were modest, total employment generated by the program (but not employment in irrigation-related activities) significantly increased productivity, suggesting alleviation of liquidity constraints and implicit insurance provision rather than quality of works undertaken as a main channel for program-induced productivity effects.