The Spillover Effects of Public Works on Migration, Labor Allocation and Wages: Evidence from National Rural Employment Guarantee Scheme, India

Rural workfare programs guaranteeing work at above market wages are intended to provide security to the unemployed during the agricultural off-season and are an increasingly used feature of labor market policy in developing countries. In recent work, India’s National Rural Employment Guarantee Scheme (NREGS), the largest rural workfare program in the world, has been attributed with crowding out work, raising private sector wages and lowering rural-urban migration. However, the empirical literature is agnostic about the sign and magnitude of spillovers generated by the large scale program. This paper studies the spatial spillover effects of NREGS on migration, time allocation and casual wages in areas which did not receive the program over the study period. Standard economic theory predicts that wage differentials across labor markets linked by migration should lead to equalization of wages in a competitive equilibrium. This analysis exploits the plausibly exogenous variation in wage differentials introduced by the staggered rollout of NREGS across contiguous program and non-program districts. It then tests the hypothesis that the program generated labor market spillovers to non-program districts using a nationally representative employment survey. Our results show that on average, real wage for casual labor increased by 2.7% with every additional program neighbor in non-program districts. Additionally, the impact of having only program neighbors was estimated to be a 17.5% rise in real wage for casual labor in non-program districts, relative to districts without any NREGS neighbors. The effects on individual level labor supply, non-labor force participation and unemployment are not statistically significant. Together, these results provide empirical support for predicted effects from theory