Equilibrium Distributional Impacts of Government. Employment Programs: Evidence from India's Employment Guarantee

This paper presents evidence on the equilibrium labor market impacts of a large rural workfare program in India. We use the gradual roll out of the program to estimate changes in districts that received the program earlier relative to those that received it later. Our estimates reveal that following the introduction of the program, public employment increased by .3 days per prime-aged person per month (1.3% of private sector employment) more in early districts than in the rest of India. Casual wages increased by 4.5%, and private sector work for low-skill workers fell by 1.6%. These effects are concentrated in the dry season, during which the majority of public works employment is provided. Our results suggest that public sector hiring crowds out private sector work and increases private sector wages. We use these estimates to compute the implied welfare gains of the program by consumption quintile. Our calculations show that the welfare gains to the poor from the equilibrium increase in private sector wages are large in absolute terms and large relative to the gains received solely by program participants. We conclude that the equilibrium labor market impacts are a first order concern when comparing workfare programs with other anti-poverty programs such as a cash transfer.