Research in Focus

Is the World’s Largest Public Workfare Programme Crowding Out Private Employment?





Abstract :
The paper uses establishment-level employment and operating data to examine the potential effects of the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), an employee guarantee programme, on labour and private firms. It studies the ways in which this programme affects employment, wages, investment in plant and machinery, and firm profitability. The authors find that the programme led to an exodus of workers from formal employment in factories towards the employment guarantee scheme, resulting in a labour supply shortage. Factories responded to this shortage by increasing mechanisation, often sub-optimally, as evidenced from an immediate drop in profitability. These effects are seen most prominently in firms with lower labour productivity and higher output volatility. For employees, the effects are observed for those at the lower end of the wage spectrum and those working in pro-employer states. Overall, there is a mass shift of labour from corporate employment to the MGNREGA.

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About the Authors:

Shashwat Alok is Assistant Professor of Finance at ISB; Sumit Agarwal isProfessor of Finance at the McDonough School of Business, Georgetown University; Yakshup Chopra is Researcher at the Centre for Analytical Finance at ISB and Prasanna Tantri is Senior Associate Director at the Centre for Analytical Finance at ISB.

About the Research:

Agarwal, Sumit, Alok, Shashwat, Chopra, Yakshup, and Tantri, Prasanna L prepared this case solely as a basis for class discussion. This case is not intended to serve as an endorsement, a source of primary data, or an illustration of effective or ineffective management. This article first appeared on ISB Insight - Management Briefs. This research has been supported by the Centre for Analytical Finance at ISB.