Can rural public works affect agricultural wages? Evidence from India

It has long been hypothesised that public works programmes, in addition to the welfare effect on those directly employed, can influence equilibrium wage rates. In this paper we test the impact of the Indian government’s major public works programme, the National Rural Employment Guarantee (NREG), on agricultural wages. The rollout of NREG in three phases is used to identify difference-in-difference estimates of the programme effect. Using monthly wage data from the period 2000-2011 for a panel of 249 districts across 19 Indian states, we find that on average NREG boosts the real daily agricultural wage rates by 5.3 per cent. It takes 6 to 11 months for an NREG intensity shock to feed into higher wages. The wage effect appears to be gender neutral and biased towards unskilled labour. It is positive across different implementation stages and months. It remains significant even after controlling for rainfall; district and time fixed effects; and phase-wise linear, quadratic, and cubic time trends. The validity of our identification strategy is confirmed by placebo tests. We argue that since most of the world’s poor live in rural areas, and the poorest of the poor are agricultural wage labourers, rural public works constitute a potentially important anti-poverty policy tool.