Growth improves wages more than MNREGA

Agricultural wages have been galloping upwards for six years, rising much faster than prices. So, the living standards of rural labourers, the poorest of the poor, have improved at a record pace (6.8% real growth per year since 2007-08 ).

What’s behind this excellent trend? Many politicians and leftist analysts think it is the rural employment guarantee scheme, MNREGA. Others (including me) have argued that rapid GDP growth has been the main reason.

The issue has now been clinched by a research study by Ashok Gulati and his colleagues at the Commission for Agricultutral Prices and Costs. GDP growth and two of its constituents (growth of agriculture and construction) are by far the biggest drivers of rural wages. The impact of MNREGA is statistically insignificant in some states, and in other states it is significant but a minor influence on wages.

This proves once again that economic growth is good for the poor, and hasn’t just benefited a tiny elite. The main benefit of fast growth is not that additional revenue trickles down to the poor in the form of additional anti-poverty schemes like MNREGA. Rather, the main benefit from fast growth is the creation of new opportunities for entrepreneurs and workers, which improve productivity and push up real wages.

For centuries, there was a huge reserve army of labour that kept wages low even when productivity and employment increased. But rapid growth in the last decade has finally soaked up the entire reserve army of labour and created labour shortages in all sectors — agriculture, industry, services. With many youngsters studying rather than working — to better grasp new opportunities created by growth — the national workforce hardly grew at all between 2004 and 2009. MNREGA is often accused of creating the labour shortage, but is too small to do so — the budget outlay is barely 0.3% of GDP. MNREGA may in some places have exacerbated the labour shortage, but not caused it.

This should be no surprise. After all, wages rose sharply with fast GDP growth in all miracle Asian countries, none of which had MNREGA.

Analysing data for 16 states from 1990-91 to 2011-12, the CACP study finds that, overall, a 10% increase in GDP is associated with a 2.4% increase in real rural wages. Among sectors, the most important influence is not growth of agriculture but growth of construction, since construction is the sector that draws labour away from agriculture and creates a labour shortage that pushes up wages. A 10 per cent growth in construction pushes up rural wages 2.9%. Sadly, instead of doing everything to encourage construction (and hence wages), central and state governments have placed many barriers. The Doing Business 2013 report of the IFC/World Bank says India is 183rd of 185 countries in ease of getting a construction permit. Red tape and corruption are rife.

MNREGA’s impact is significant in five states: Andhra Pradesh, Tamil Nadu, Rajasthan, Assam and West Bengal. However, its impact is not significant in many big, poor states — Uttar Pradesh, Bihar, Maharashtra and Odisha. The data also have some puzzles: Gujarat and Haryana display a slow growth of rural wages despite buoyant GDP growth and agricultural growth.

Many farmers complain that rural workers get paid for just hanging around MNREGA worksites, even as labour shortages hit farming. The complaint is exaggerated, but may partly be true. Studies show that few durable assets are created by MNREGA: it is mainly a welfare scheme doling out cash. So, MNREGA draws some workers away from productive farm work to unproductive mud roads that are destroyed every monsoon.

So, the CACP study suggests broadening the scope of MNREGA to include normal farm activity. It suggests that MNREGA funds could provide a 50% subsidy to wages given by farmers. That will reduce the labour shortage and deploy workers in more productive work.

A variation of this has been proposed by economist Ajit Ranade for industrial workers. Industry too is complaining of a labour shortage, and (probably wrongly) attributes this to MNREGA. Ranade has suggested using MNREGA funds to subsidise wages of freshly hired industrial workers, thus helping move low-productivity rural workers to higher-productivity industry, easing industrial labour shortages in the bargain.

Problem: such schemes can result in blatant cronyism. NREGA has far too little cash to subsidise all industrial or agricultural workers, even if that was desirable. Only a few select farmers and industrialists will get the benefit of subsidized workers, and these will often be those with the best political contacts or biggest pay-offs . This could become a big scam. It is dangerous territory, not to be entered lightly.

One thought on “Growth improves wages more than MNREGA

  • 2013.May.03 at 18:03

    Though Tamilnadu has no perennial rivers like north India, it receives large quantity of water through rains of south west / north east monsoons. But maximum quantity of them unnecessarily reaches Bay of Bengal. Sometimes excess rain causes havoc due to flood. In my view the labour force of MNREGA should be used to create thousands of bonds and lakes through out as was created by Pallava in Chenglepet district and Pandya in Ramnad district. It would not only solve our water requirement but would result in less dependancy from Karnataka. Economists like you may kindly suggest to appropriate authorities so as implement above suggestion instead of using this labour force for repairing non existing mud roads repeatedly and filling the pockets of few contractors, politicians and Govt officials. I have personally seen these labour force performs just two hour job, take rest and return home after the completion of stipulated hours. This force needs to be utilised fruitfully.


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