The impact of India's Employment Guarantee Scheme on rural earnings

Income support schemes in rural areas have traditionally taken the form of subsidization of agricultural inputs or consumption goods. However, now the emphasis is shifting towards using workfare programs as a means of reaching the poorest sections of society. The Employment Guarantee Scheme (EGS), in the state of Maharashtra is one such program, whose success in providing a safety net for the poor has been widely acknowledged. The program provides unlimited employment at a fixed wage. This dissertation evaluates the net income gain for a household from participation in the program, taking into account the opportunity cost of foregone employment in other sectors. The economic model presented in the paper is a family labour supply model, where each family member makes a joint participation and labour supply decision across three sectors--the family farm, the agricultural labour market and the EGS and these decisions are determined jointly for all members of the family. Individuals face a downward sloping marginal product curve on the family farm and the marginal returns from the agricultural labour market declines as an individual works more days in it. Using a family labour supply model enables one to consider intra-family labour supply substitutions across the three sectors in response to EGS. The income in the absence of EGS is obtained from the above model, by removing the government sector. The paper uses longitudinal data from the ICRISAT data set for India, to estimate the earnings in the absence of the program, and thus the net income gain from it. The predicted gain varies from 0.2% for a household in the highest quintile in the income distribution to 38% for a household in the lowest quintile. Thus the program not only increases average earnings but also changes the income distribution in favour of the poorer sections of society.