A Quantitative Analysis of Employment Guarantee Programs with an Application to Rural India

This paper examines the welfare effects of a work-fare program in an economy where agents face exogenous income shocks and are unable to insure themselves through private markets. A dynamic general equilibrium model is calibrated using data from two ICRISAT villages in the Indian state of Maharashtra, which had a functioning Employment Guarantee Scheme (EGS) in the period 1979-1984. In general, because ofits insurance aspect, the optimal wage rate in the EGS is found to be higher than the marginal product of labor. The optimal wage and the welfare gains of the program depend on how productive the EGS is, relative to the private sector. The welfare gains of paying the optimal wage as opposed to a wage equal to the marginal product of labor in the EGS varies from 0.01% of GDP to 2.63% of GDP, depending on the labor productivity of the EGS. The actual wage paid by the EGS during the years 1979-1984 yields a welfare level that is lower than paying a wage equal to the marginal product of labor. Moreover the 1988 increase in wages actually decreased wages.