Government Employment Guarantee, Labor Supply and Firms’ Reaction: Evidence from the Largest Public Workfare Program in the World
Journal of Financial and Quantitative Analysis, March 2021
58 Pages Posted: 6 Dec 2016 Last revised: 28 May 2021
Date Written: January 1, 2017
Using establishment-level employment and operating data, we examine the impact of the Indian government’s employment guarantee program on labor and firm behavior. We exploit the staggered implementation of the program for identification and find that the program led to a 10% reduction in permanent workforce in firms. Firms responded to the adverse labor supply shock by resorting to increased mechanization. This significantly increases the firms’ cost of production, thereby leading to a decline in net profits and productivity. These effects manifest primarily in firms paying low wages, having low labor productivity and greater sales volatility, and firms located in states with pro-employer labor regulations.
Keywords: Workfare, Labor Markets, Labor Supply, Labor Scarcity, Capital Investments, Labor and Finance, Labor-Technology Substitution, MNREGA, NREGS, NREGA
JEL Classification: G21, G32, D24, J30, J65
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