Skip to main content
SpringerLink
Log in

Understanding NREGA: A Simple Theory and Some Facts

  • Chapter
  • First Online:
Human Capital and Development

Abstract

The government of India has implemented the National Rural Employment Guarantee Act (NREGA) in recent past, to complement the income of the poor by providing them employment for certain number of labour days in a year. In this chapter, using a simple theoretical framework, we have analysed the impact of NREGA scheme on (1) rural labour market, (2) income of the poor households and (3) overall agricultural production. We show that in some situations the poor may exhibit a backward-bending supply curve of labour which may lead to an aggregate reduction in agricultural output. This adverse production effect can arise even when the NREGA activities lead to a moderate improvement in agricultural productivity. Some empirical facts validate our concerns and the data on food prices tend to support our finding to some extent.

This is a preview of subscription content, log in via an institution to check access.

Access this chapter

Log in via an institution
Chapter
USD 29.95
Price excludes VAT (USA)
  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever
eBook
USD 84.99
Price excludes VAT (USA)
  • Available as EPUB and PDF
  • Read on any device
  • Instant download
  • Own it forever
Softcover Book
USD 109.99
Price excludes VAT (USA)
  • Compact, lightweight edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info
Hardcover Book
USD 109.99
Price excludes VAT (USA)
  • Durable hardcover edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info

Tax calculation will be finalised at checkout

Purchases are for personal use only

Institutional subscriptions

Notes

  1. 1.

    This section borrows from Basu et al. (2005).

  2. 2.

    There are eight specific types of works listed in the NREGA: (1) water conservation and water harvesting; (2) drought proofing including afforestation; (3) irrigation canals; (4) provision of irrigation facility to land owned by SC and ST, and land of beneficiaries of land reforms and of Indira Awaas Yojana (IAY) (rural housing for poor); (5) renovation of traditional water bodies; (6) land development; (7) flood control works; (8) rural connectivity to provide all weather access; and (9) any other work, which may be notified by central government in consultation with state government (see Mehrotra 2008 for more discussion on this issue).

  3. 3.

    All the data cited in this chapter are from the relevant government of India websites like http://www.agricoop.nic.in/ and http://nrega.nic.in/netnrega/home.aspx. Further calculations are done by authors.

  4. 4.

    Much has been written about NREGA both in favour and against the programme. Some argued that the NREGA was unnecessary because in any case poor agricultural workers had a very low unemployment rate (Business Standard, 25 December 2004).

  5. 5.

    The productive value of NREGA works is also something of a mystery. The general impression is that they are mostly useless. Some dismissed them as a futile attempt “to play with mud, to create a road that goes from nowhere to nowhere, to dig ditches that will be washed away in the next monsoon” (The Hindustan Times, 14 February 2008). This verdict, however, is hard to substantiate or negate, and we leave this again as a subject of empirical enquiry.

  6. 6.

    Basu et al. (2010) found in their sample that 94% of land is inherited, while 2% is purchased, and the rest of land is obtained either as gifts or through share cropping or through encroachment of village commons or forests.

  7. 7.

    The standard textbook in Development Economics always work with such a scenario (for instance, see Basu (1997) and Ray (1998)).

  8. 8.

    This relies on the assumption that substitution of labour by machine is not possible in the short run. However, there are evidences that the demand for labour saving technology such as tractors and harvesters has gone up in response to NREGA in some states like Haryana and Punjab in India.

  9. 9.

    There is evidence that the labour market is imperfect and characterised by market power in both rural and urban areas (Bardhan and Rudra 1981; Bardhan 1979, 1984; Binswanger et al. 1984; Card and Krueger 1995; Datt 1997; Manning 2005). Mukherji (2005) explored the relationship between wages and employment in a spectrum of labour market structure. He argued that when the labour market is non-competitive, the “unique link” between wages and employment break down, and thus, the rise in minimum wage does not necessarily reduce the employment.

  10. 10.

    Basu et al. (2010) used a similar utility function for the household in the context of child labour supply. They found that given the fixed target income of the household, the child labour supply behaves as inverted U shape with respect to the landholding of the household.

  11. 11.

    Here we have presumed that with excess supply of labour it is not possible to reach the target income with such a low wage for the poor households.

  12. 12.

    Note that if the wage rate w  >  w h, then the poor would decide not to cultivate their land and only supply the labour to the rich household. In that case l p  =  0. This is the case when the poor households become agricultural labourers and stop cultivating their own land.

  13. 13.

    There is also the possibility that the poor households reach their target income only from cultivating their own land. In that case the labour market vanishes at the prevailing wage. We leave this uninteresting case out.

  14. 14.

    One can increase the size of the village by replicating the number of households in the given proportion, and all our results in this section would still hold true.

  15. 15.

    The detailed calculation can be obtained from the authors on request.

  16. 16.

    Nikhil Dey, the Mazdoor Kisan Shakti Sangathan.

References

  • Bardhan P (1979) Labor supply functions in a poor agrarian economy. Am Econ Rev 69:73–83

    Google Scholar 

  • Bardhan P (1984) Land, labor, and rural poverty: essays in development economics. Oxford University Press, Delhi

    Google Scholar 

  • Bardhan PK, Rudra A (1981) Terms and conditions of labour contracts in agriculture: results of a survey in West Bengal 1979. Oxford Bulletin of Economics and Statistics 43, 1 February. Bernstein, Irving, 1970. Turbulent years: a history of the American Worker, 1933–1941. Houghton Mifflin, Boston

    Google Scholar 

  • Basu K (1981) Food for work programmes: beyond roads that get washed away. Economic and Political Weekly, 3–10 January

    Google Scholar 

  • Basu K (1997) Analytical development economics: the less developed economy revisited. MIT Press, Cambridge

    Google Scholar 

  • Basu AK (2007) Impact of rural employment guarantee schemes on seasonal labor markets: optimum compensation and workers’ welfare. College of William and Mary, Mimeo

    Google Scholar 

  • Basu A, Chau N, Ravi K (2005) The National Rural Employment Guarantee Act of India, Entry for the Oxford Companion to Economics in India

    Google Scholar 

  • Basu K, Das S, Dutta B (2010) Child labor and household wealth: theory and empirical evidence of an inverted-U. J Develop Econ 91:8–14

    Article  Google Scholar 

  • Berg E (1961) Backward-sloping labor supply function in dual economies – African ease. Q J Econ 75(3):468–492

    Article  Google Scholar 

  • Bernstein I (1970) Turbulent Years: a history of the American Worker, 1933–1941. Houghton Mifflin, Boston

    Google Scholar 

  • Besley T, Coate S (1992) Workfare vs. welfare: incentive arguments for work requirements in poverty alleviation programs. Am Econ Rev 82(2):249–261

    Google Scholar 

  • Besley T, Kanbur R (1993) Principles of targeting. In: Lipton M, van de Gaag J (eds) Including the poor: proceedings of a symposium organized by The World Bank and The International Food Policy Research Institute. The World Bank, Washington, DC, pp 67–90

    Google Scholar 

  • Bhalla SS (2004) Ten Lies and an Act: I. Business Standard, 25 Dec 2004

    Google Scholar 

  • Bhalotra S (2007) Is child work necessary? Oxford Bull Econ Stat 69(1):29–55

    Article  Google Scholar 

  • Binswanger HP, Doherty VS, Balaramaiah T, Bhende MJ, Kshirsagar KG, Rao VB, Raju PSS (1984) Common features and contrasts in labor relations in the semiarid tropics of India. In: Binswanger H, Rosenzweig M (eds) Contractual arrangements, employments, and wages in rural labor markets in Asia. Yale University Press, New Haven, pp 143–168

    Google Scholar 

  • Blaug M (1963) The myth of the old poor law and the making of the new. J Econ Hist 23:151–184

    Google Scholar 

  • Blaug M (1964) The poor law report re-examined. J Econ Hist 24:229–245

    Google Scholar 

  • Card D, Krueger AB (1995) Myth and measurement: the new economics of the minimum wage. Princeton University Press, Princeton

    Google Scholar 

  • Dasgupta P, Goldar B (2005) Female labour supply in rural India: an econometric analysis. Discussion Paper, E/265/2005. Institute of Economic Growth, Delhi

    Google Scholar 

  • Datt G (1997) Bargaining power, wages and employment: an analysis of agricultural labor markets in India. Sage, London

    Google Scholar 

  • Dessing M (2002) Labour supply, the family and poverty: the S-shaped labour supply curve. J Econ Behav Organ 49:433–458

    Article  Google Scholar 

  • Drèze J, Khera R (2009) The battle for employment guarantee. Frontline 26(01), 3–16

    Google Scholar 

  • Drèze J, Sen A (1991) Strategies of entitlement protection. Chapter 7, In Hunger and public action, Oxford University Press, pp 104–121

    Google Scholar 

  • El-Hamidi F (2003) Poverty and labour supply of women: evidence from Egypt. Paper presented at tenth annual conference of the Economic Research Forum, 16–18 December

    Google Scholar 

  • Kesselman JR (1978) Work relief programs in the great depression. In: Palmer JL (ed) Creating jobs: public employment programs and wage subsidies. Brookings Institution, Washington, DC

    Google Scholar 

  • Lewis WA (1954) Economic development with unlimited supplies of labor. Manch Sch Econ Soc Stud 22:139–91

    Article  Google Scholar 

  • Licona GH (2000) Reshaping the labour supply curve for the poor. Paper presented at the annual meeting of the Latin American and Caribbean Economic Association, Rio

    Google Scholar 

  • Lipton M (1996) Success in anti-poverty. Issues in development discussion paper, vol 8. International Labour Office, Geneva

    Google Scholar 

  • Mahambare V, Nadkarni R (2011) Unemployment in India: uneven and weak. A study by CRISIL Centre for Economic Research, CRISIL Research Report Employment Eco Insight, India

    Google Scholar 

  • Manning A (2005) Monopsony in motion: imperfect competition in labor markets. Princeton University Press, Princeton

    Google Scholar 

  • Mathur L (2007) Employment guarantee: progress so far. Economic & Political Weekly, 29 Dec 2007

    Google Scholar 

  • Mehrotra S (2008) NREG two years on: where do we go from here? Economic & Political Weekly, 2 Aug

    Google Scholar 

  • Mellor JW (1963) The use and productivity of farm family labor in early stages of agricultural development. J Farm Econ 45(3), 517–534

    Google Scholar 

  • Mukherji A (2005) On wages and employment. Ind J Lab Econ 49:66–77

    Google Scholar 

  • Nair KN, Sreedharan TP, Anoopkumar M (2009) A study of National Rural Employment Guarantee Programme in three grama panchayats of Kasaragod district, Working paper 413, Centre for Development Studies, Trivandrum, India

    Google Scholar 

  • National Sample Survey: NSS Report no. 509. Household consumption of various goods and services in India, 2004–2005, NSS 61st Round, July 2004–June 2005

    Google Scholar 

  • National Sample Survey: NSS Report no. 530. Household consumer expenditure in India, 2007–08, NSS 64th Round, July 2007–June 2008

    Google Scholar 

  • Ravallion M (1990) Market responses to anti-hunger policies: effects on wages prices and employment. In: Drèze J, Sen A (eds) The political economy of hunger. Clarendon, Oxford

    Google Scholar 

  • Ravallion M (1991) Reaching the rural poor through EGS employment: arguments, lessons, and evidence from South Asia. World Bank Res Obs 6(1):153–176

    Article  Google Scholar 

  • Ravallion M, Datt G, Chaudhuri S (1993) Does Maharashtra’s employment guarantee scheme guarantee employment? Effects of the 1988 wage increase. Econ Dev Cult Chang 41(2):251–275

    Article  Google Scholar 

  • Ray D (1998) Development economics. Princeton University Press, Princeton

    Google Scholar 

  • Rajshekhar M. Can Centre fix NREGS wages in isolation? The Economic Times, 5 Apr 2011 http://www.im4change.org/rural-news-update/can-centre-fix-nregs-wages-in-isolation-by-m-rajshekhar-6961.html

  • Banerji D. UPA Govt’s NREGA back on table for removing flaws, The Economic Times, 1 Aug 2011 http://articles.economictimes.indiatimes.com/2011-08-01/news/29838758_1_rural-roads-scheme-national-rural-employment-guarantee

  • Ghose S. The idiocy of urban thinking, The Hindustan Times, 14 Feb 2008 http://www.hindustantimes.com/editorial-views-on/Platform/The-idiocy-of-urban-thinking/Article1-275862.aspx

  • Prasad N. Ministry seeks to halt job plan in farm season, The Hindustan Times, 14 July 2011 http://www.hindustantimes.com/India-news/NewDelhi/Ministry-seeks-to-halt-job-plan-in-farm-season/Article1-721231.aspx

  • Von Braun J (1995) Employment for poverty reduction and food security. International Food Policy Research Institute, Washington, DC

    Google Scholar 

Web References

Download references

Acknowledgement

We are grateful to Nancy Chau, Deepti Goel, Bishwantath Goldar and J. V. Meenakshi for helpful comments on an earlier version of this chapter.

Author information

Authors and Affiliations

  1. Indian Statistical Institute, Kolkata, India

    Diganta Mukherjee

  2. Department of Economics, Delhi School of Economics, University of Delhi, New Delhi, 110007, India

    Uday Bhanu Sinha

Authors
  1. Diganta Mukherjee
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Uday Bhanu Sinha
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Uday Bhanu Sinha .

Editor information

Editors and Affiliations

  1. Madras School of Economics, Chennai, 600 004, Tamil Nadu, India

    Natteri Siddharthan

  2. , Humanities and Social Sciences, Indian Institute of Technology Bombay, Mumbai, 400 076, Maharashtra, India

    Krishnan Narayanan

Rights and permissions

Reprints and permissions

Copyright information

© 2013 Springer India

About this chapter

Cite this chapter

Mukherjee, D., Sinha, U.B. (2013). Understanding NREGA: A Simple Theory and Some Facts. In: Siddharthan, N., Narayanan, K. (eds) Human Capital and Development. Springer, India. https://doi.org/10.1007/978-81-322-0857-0_7

Download citation

Publish with us

Policies and ethics

Search

Navigation