NCPA - National Center for Policy Analysis

A GUARANTEED JOB

February 9, 2005

The new government of India is considering guaranteeing employment to anyone who wants to work, at the legal minimum wage. This might be an effective strategy to build a social safety net, but it is unclear how the country would pay for it, argues the Economist.

The authors use the example of the Indian state of Maharashtra, which issued an employment guarantee following the draught of 1972-73:

  • At its peak in the fiscal year 1985-86, the employment guarantee provided 189.5 million work days on public work projects.
  • Thanks to these public works, horticulture increased by about 800,000 hectares since 1990.
  • Moreover, most studies suggest the guarantee targeted the poor better than India's other welfare schemes.

However, a lot depends on the wage offered. The Maharashtra plan worked until 1988, when the minimum wage doubled. At those wages, the government had to ration the number of hours provided -- only 43 percent of the demand for work was met in 1988.

If done effectively, this policy could be an effective safety net.

  • The rural poor, with little access to credit or insurance, have few opportunities to smooth their consumption in the face of misfortune.
  • Providing a safety net might encourage farmers to take productive risks, such as experimenting with high-yielding seed varieties.
  • Moreover, it might prevent them from slaughtering their working animals or pulling their children out of school -- effectively preserving both their physical and human capital.

The problem, however, is how to pay for it. India's budget deficit is already 10 percent of GDP and its public debt amounts to 80 percent of GDP, notes the Economist.

Source: "India's poor law," Economist, January 29, 2005.

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