Understanding the effects of the world’s largest workfare program

As the world’s largest workfare program, India’s Mahatma Gandhi National Rural Employment Guarantee Scheme (NREGS) has attracted much atten­tion. Yet its impacts on agriculture have been relatively neglected. A re­cent paper by Deininger, Nagarajan, and Singh addresses this gap by fo­cusing on the program’s effects on ag­ricultural productivity as well as labor market outcomes.

The program offers unskilled em­ployment, for up to 100 days a year per household, in projects to provide local productivity-enhancing infrastructure. Wages are set by statute, at rates that are equal for men and women and, it is hoped, not attractive enough to pre­vent effective self-targeting.

Workfare programs like NREGS can affect agricultural productivity through several channels. By using labor, they can affect wage rates and employment levels in the short term and produc­ers’ choice of technology and the capital intensity of production in the medium to long term. By providing implicit insurance against downside risk, in the form of predictable wage payments, they may allow poor farm­ers to increase investment or adopt crop portfolios with higher risk-return profiles. And by constructing or im­proving local infrastructure, they may increase agricultural productivity and thus boost returns to land and labor, the main assets of small farmers and the rural poor.

The authors use unique panel data covering the same households in 1999/2000 (before the program) and 2007/08 (after some had received the program), complemented by informa­tion on the program’s implementa­tion in a subset of villages. Using these data and a robust method, they assess the program’s short-term im­pacts on rural wages, labor demand, and agricultural production struc­tures. They find that in the short term NREGS led to a marked increase in agricultural wages and higher levels of nonfarm casual work and on-farm self-employment. The program trig­gered more intensive use of irrigation and greater diversification of crop portfolios, especially by small farmers. It also increased productivity, largely by alleviating liquidity constraints and improving access to insurance.

Results suggest that the program increased the wage significantly with­out crowding out private employment. Most of this increase can be attrib­uted to higher wages in agriculture, which affected men and women about equally. Women also experienced an increase in nonagricultural wages.

Analysis of the extent to which wage changes affected labor allocation points to insignificant impacts on ag­ricultural wage work in the aggregate. While a significant increase in nonfarm casual work may be attributed to the aggregation of NREGS and other work, there is also evidence of a program-induced increase in on-farm self-employment. But while men increased their labor supply to the agricultural sector, women shifted away from farm to nonfarm employment and to some extent salaried work.

Increases in labor supply to the nonfarm sector were concentrated among landless and small to medium-size farmers, suggesting effective self-targeting. Increases in labor sup­ply to agricultural self-employment emerged only for small and, to some degree, medium-size farmers, possi­bly because some NREGS investment can be performed on farms. There is also some evidence of a reduction in nonfarm self-employment and an in­crease in salaried work by the largest landowners.

Results indicate that the program had a significant impact on agricultural productivity, in part by supporting di­versification. Evidence suggests that the program led to greater use of ma­chinery and fertilizers, a shift beyond rice and wheat toward riskier crops not covered by government-imposed floor prices, and an increase in the intensity of cultivation (the number of seasons in which crops are grown during a year). Some of these effects may be ex­plained by the program’s effects in in­creasing farmers’ liquidity. In addition, the rehabilitation of infrastructure and construction of new small-scale water conservation structures may have helped support more intensive land use, particularly the planting of a second or third crop beyond wheat or paddy.

Evidence on how workfare affects agricultural productivity matters not only for a better understanding of the NREGS intervention. It also has im­plications for the broader debate on the comparative merits of this type of approach. Workfare programs rely on work requirements as a screening device based on the assumption that such screening makes these programs a more cost-effective tool for social protection than, say, unconditional cash transfers. But such programs would be less desirable if they dis­placed existing workers rather than generating new jobs, if supply-side constraints were to reduce the ef­fectiveness of self-targeting, or if the work done had no productive value. Concerns have been raised about NREGS in each of these areas. While further study of the extent to which such effects persist in the longer term is needed, the authors’ findings sug­gest that the potential productivity benefits of workfare could be an im­portant aspect to take into account in evaluating the impact or desirability of such programs.

*This blog is featured as a part of a series of posts higlighting articles from the 2017 Spring issue of the World Bank Research Digest available at:  http://econ.worldbank.org/research_digest