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Impact of MNREGA on labour markets

There is an active, ongoing debate on whether MNREGA should be retained in its current form.  Clément Imbert and John Papp explain research which suggests that MNREGA increased rural and urban wages and reduced seasonal rural-to-urban migration.  They argue that the effect of MNREGA on labour markets should play a role in the discussion on whether and how to reform the scheme.

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Impact of MNREGA on labour markets

There is an active, ongoing debate on whether MNREGA should be retained in its current form. This column reports on research which suggests that MNREGA increased rural and urban wages and reduced seasonal rural-to-urban migration. It argues that the effect of MNREGA on labour markets should play a role in the discussion on whether and how to reform the scheme.

Policymakers and academics are actively debating the efficacy of India’s Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) and whether or not the new government should retain it in its current form (Bhagwati and Panagariya 2014, Abreu et al. 2014, Banerjee 2014). In recent research, we evaluate the impact of MNREGA on rural labour markets, and on urban labour markets via its impact on seasonal migration (Imbert and Papp 2014a, 2014b).
Rural wages
In our first paper (Imbert and Papp 2014a), we use National Sample Survey (NSS) data to evaluate the impact of MNREGA on rural labour markets. We present evidence that between 2004-05 and 2007-08, in the 330 districts where MNREGA was first introduced, private sector work decreased one for one with public sector hiring, and wages for casual labour excluding MNREGA work increased by 5%. These effects were concentrated in the months from January to June, when MNREGA work sites are open, and in seven states (Andhra Pradesh (AP), Chhattisgarh, Madhya Pradesh (MP), Himachal Pradesh (HP), Rajasthan, Tamil Nadu and Uttarakhand) which provided most of the MNREGA work. The results suggest the rural poor may benefit from MNREGA in at least two ways: directly by earning income through participating in the programme, and indirectly by earning higher wages while doing non-MNREGA casual labour for private employers. We quantify these two effects and find the indirect gain from the increase in private sector wages is significant, equivalent to 50% of the direct gains from participating in the programme.
Rural-to-urban migration
In our second paper (Imbert and Papp 2014b), we study the impact of MNREGA on rural to urban migration and urban wages. Drawing from NSS data, we consider two types of migration: short-term migration (adults who spent one to six months away for work during the last year) and long-term migration (adults who left the household to live elsewhere). To evaluate MNREGA impact, we compare changes in migration between 1999-00 and 2007-08 in rural districts where MNREGA was first introduced in states which actively implemented MNREGA (AP, Chhattisgarh, Himachal Pradesh, MP, Rajasthan, Tamil Nadu and Uttarkhand), and in other rural districts. We find that MNREGA decreased short-term migration by 10% and had no effect on long-term migration. These results are confirmed using detailed survey data collected by the RICE institute in 70 villages at the border of Rajasthan, MP and Gujarat. As compared to workers living in similar villages just across the border, adults in Rajasthan work nine more days on MNREGA and are 18% less likely to leave the village for work during the summer months (March-July).
Urban wages
In Imbert and Papp 2014b, we argue that given the relative sizes of the rural and urban labour force, even a small change in short-term migration from rural areas may have large effects on urban wages. We test this empirically by using a model of migration flows to predict separately for each city short-term migration rates from rural areas where MNREGA work was provided in 2007-08, and from rural areas where MNREGA work was not provided. We show that wages increased in cities that rely more on migrants from rural areas with MNREGA. According to our estimates, the drop in seasonal migration caused by MNREGA increased urban wages by 6%. This is not the end of the story, because the rise in urban wages in turn attracted more short-term migrants from rural areas without MNREGA work, which mitigated the increase of urban wages. Across India we estimate that increased migration from districts without MNREGA work decreased urban wages by 5%, so that the net effect is +1%. This mitigating factor may have been short-lived, however, as MNREGA was later rolled-out across rural India, which would have decreased seasonal migration and further increased urban wages.
Redistributing income from rich to poor
MNREGA, like many other social programmes in developing countries, uses money from a mostly urban tax base to provide income support to the rural poor. Our results highlight another effect of MNREGA: by raising wages in rural and urban areas, it redistributes income from the rich, who are more likely to hire labour, to the poor, who are more likely to be casual labourers.
Our findings do not allow us to perform a complete cost-benefit analysis of the programme. For a complete analysis we would first need to take into account leakages of MNREGA funds (see Imbert and Papp 2011, 2014), which increase the cost of providing employment. We would also need to measure the productivity of MNREGA infrastructure, on which we have little evidence. Nevertheless, our results suggest that the effect of MNREGA on labour markets should play a role in the discussion on whether and how to reform the scheme.
Further Reading