Wages of a quick fix

Indian Express, 21 July 2011

The Ministry of Agriculture has asked for NREGA to be suspended during peak farming seasons of sowing, transplantation and harvesting. NREGA has raised the cost of farming, by pushing up labour costs by as much as 40 per cent. This is particularly problematic in states like Punjab and Haryana, where farmers depend on migrant labourers from poorer states in peak time.

But it is difficult for the government to meet the Ministry's request as the Act entitles people to employment under the NREGA irrespective of the season in which they demand work. The Agricultural Ministry's request raises some fundamental questions about the design of the NREGA. The public discussion about NREGA emphasises implementation problems such as leakages and the lack of social audits. However, NREGA also suffers from deeper design problems, where the solution cannot be found in better implementation.

The Act entitles people working under this scheme to 100 days of wages at the minimum wage rate fixed by the state government for agricultural labourers or a wage notified by the central government. If employment is not provided under NREGA to a worker who has applied for work, then the State government has to pay an unemployment allowance. This design does not take into account the nature of India's unemployment problem. Further, it is likely to make unemployment persistent and keep productivity growth weak.

Unemployment in India can be described as mainly structural and seasonal. Structural unemployment occurs, usually as a long run phenomenon, when there is a mismatch between demand for labour and the skills and location of the workers looking for employment. This been the biggest source of unemployment in India. Structural unemployment is normally seen as permanent unemployment and can be solved only in the long run. On the demand side, an increase in demand of labour arising from growth of industry and services and capital accumulation reduces structural unemployment. On the supply side, better skills and greater mobility of labour addresses the problem.

Seasonal unemployment is seen when the demand for labour is seasonal as in farming. Since nearly sixty percent of Indians live in rural India, and the nature of work there is often linked to agriculture, these opportunities tend to be seasonal. Hence, in rural India, there is an important problem of seasonal unemployment.

Cyclical unemployment arises when employment grows or declines with the business cycle. Since India did not have economy-wide business cycles in the pre-liberalisation era, cyclical unemployment was not significant. Even after the nineties, when business cycles have become a regular feature of the Indian economy, cyclical unemployment in primarily seen in urban India when industry and services see low growth.

Structural unemployment in rural India has been a source of concern for the country. In the pre-NREGA era, the solution for underemployment and unemployment was understood to be a transformation of the Indian economy with growth of industry and services. Migration and improving human skills though education and through greater participation in the labour force were viewed as the key ways in which employment in India would grow.

Earlier employment programmes in India, such as in the state of Rajasthan, which has seen frequent droughts, were mainly public work programmes intended to give employment to people during periods of droughts and famines. When conditions in the labour market changed as the drought ended, the programmes ended. While the NREGA was designed along the lines of such public work programmes, it introduced a big conceptual shift. It was made a regular feature of labour market regardless of conditions in the labour market.

Under the employment guarantee act the government is required to pay a statutory mininum wage for each state. This wage is often above the market clearing wage in the state.

Prior to NREGA, the minimum wage in many states was often actually higher than the market wage. The market clearing wage was the one at which labour was willing to work and employers were willing to hire labourers. The enforcement of minimum wages was often weak and a feature of unionised labour. The informal sector and non-unionised labour market would often clear at wages that were below those set as the officially designated minimum wages. In that world, while the minimum wage was not a strong feature of Indian labour market regulation, it did not do damage. Workers accepted market wages below minimum wages when they could not do better.

With the launch of NREGA, work was made available at above market prices to many individuals who should have been engaged in improving skills and/or migrating. By paying for digging earth, the NREGA took away the incentive for taking the risk of looking for work in the nearest city or in faraway states. It took away the incentive for gaining knowledge about work and the human networks required to find jobs.

Recent newspaper headlines have emphasised the design flaw in NREGA, that it contaminates the ordinary functioning of the labour market in peak season. But equally important: NREGA has the potential of making India's structural unemployment problem a persistent one by taking away the incentive to improve skills and to migrate. In the long run no country has been able to become advanced without large scale skills upgradation, migration and urbanisation. Problems related to urbanisation have to be faced and solved.

The lack of migration will have consequences for urban India as well. Labour shortages in low skilled urban jobs are likely to push employers into more capital intensive production technologies. On the other hand, a large mass of low skilled labour will be trapped in a state of dependence on the government and its politicians.

Instead of reforming labour laws and improving infrastructure, that could provide higher employment growth, the government enacted NREGA as a quick fix solution and a vote getter. But NREGA will not solve the problem of unemployment in India: instead it is likely to create poverty traps containing millions of people who are cutoff from the growth of India into a modern market economy.

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