Monday, 30th October 2017

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WORKING AT IT - Employment schemes must aim at enduring economic benefits

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By Abhirup Sarkar The author is professor of economics, Indian Statistical Institute, Calcutta
  • Published 1.02.05

Probably no piece of legislation has attracted more apprehension, cynicism or praise in the recent past than the national rural employment guarantee bill introduced in parliament last December. The declared purpose of the bill is to ensure at least one hundred days of employment over the year to poor households in the rural areas. It has been estimated that a day?s employment would cost the government around a hundred rupees per person. Out of these hundred rupees, Rs 60 would be spent on wages and the remaining Rs 40 on supportive material and administration. The employed men and women are supposed to set up rural infrastructure: construct water conservatories and minor irrigation facilities, renovate traditional water bodies and build rural roads. The total cost of the project is expected to remain within a band of one to two per cent of the national income which, according to the champions of the scheme, is a paltry sum to pay in comparison with the huge benefit it will produce.

Let us ask, at the risk of sounding daft, what benefit or benefits is the scheme supposed to deliver? Indeed, one may think of a number of alternative targets that the national employment guarantee scheme may possibly hope to achieve. First, it may be primarily targeted towards reducing unemployment in the economy. Unemployment basically implies under-utilization of human resources. It means that though the economy is well endowed with the productive input called labour, for one reason or other, these inputs are lying idle. Through this scheme the government may try to put these idle resources in use, thereby increasing output and income of the economy. It must be added that this endeavour will be restricted to labour belonging to poor households in the rural areas.

Second, the scheme may be viewed as an attempt to abate rural poverty, as a direct support or subsidy to the poor living in the hinterland. Third, the scheme may primarily aim to build up rural infrastructure, which would presumably increase productivity in the agricultural sector and improve the quality of life in the villages. Finally, the project may be interpreted as an attempt to inject purchasing power into the economy in the typical Keynesian fashion to stimulate demand. Of course, the national employment guarantee scheme may simultaneously aim to achieve all these objectives and perhaps more.

How far can the employment guarantee scheme hope to achieve these? Let us start with a common sense argument about unemployment. Common sense would suggest that it is substantially more difficult for a poor man to remain unemployed than his relatively affluent counterpart. A really poor person is always concerned with his basic survival and therefore can ill afford unemployment. He is compelled to take up almost any job that comes his way, irrespective of the remuneration. The relatively affluent, however, can afford to wait till he gets the job he is looking for. Indeed, he cannot wait all through his life. But when he is young and has a significantly long period of life ahead of him, he would have a tendency to wait and search rather than accept just any job. Of course, when we are talking about the relatively affluent, we are including even job-seekers from lower middle-class families who are perhaps supported, during their periods of joblessness, by a meagre parental income or an allowance from a working brother in the family. Neither are we suggesting that these wretched souls are living in a state of bliss.

If our argument is correct, the following should be observed to be true. First, in a country like India, where the proportion of poor families is quite large, one should not observe a very high rate of unemployment. Second, since the number of poor people is larger in the rural areas than in the cities, one should observe a higher degree of unemployment in the urban areas than in the villages. Third, one should observe higher unemployment among the educated than among the uneducated. This is partly because education increases the expectation of getting a better job and partly because there is a fairly strong correlation between the level of education one gets and the level of affluence the family enjoys.

Consecutive reports on the employment and unemployment situation in India by the National Sample Survey confirm that all these phenomena are present in the Indian economy. The rate of unemployment for the country as a whole is not reported to be very high and rural unemployment rates are observed to be consistently lower in all the states than the corresponding urban figures. For example, for the country as a whole, in 1999-2000 the unemployment rate for rural males was 2.1 per cent and for urban males it was 4.8 per cent. The corresponding figures for 1993-94 were 2.0 per cent and 5.4 per cent. Moreover, the reports reveal that the incidence of unemployment significantly goes up with the level of educational attainment of the worker. Does this evidence suggest that we need not worry about the poor? Does it mean that the poor and the uneducated in India are happily employed leading a smooth, cheerful life? Quite the contrary. The near full employment situation among the poor simply reveals their helplessness, their compulsion to accept just any job. But it also indicates that for the poor, and in particular for the rural poor, the basic problem is not of unemployment but one of low wages. How far does the rural employment guarantee scheme hope to raise rural wages?

There are reasons, however, to doubt the quality of work expected to be done under the employment guarantee scheme. Building up of rural infrastructure, which is supposed to be the end product of providing employment to the rural poor, is vital for improving the condition of the village economy. But the present scheme seems to put more emphasis on providing employment than building up infrastructure. This is precisely why it has been repeatedly pointed out that the scheme aims to build up rural infrastructure using as much labour as possible. No one seems to be worried about efficiency or the quality of the end product. But if the end product is flawed, we can hardly expect an improvement in rural productivity and a consequent permanent rise in rural wages. In other words, if attention is focussed mainly on short-run rural employment generation and on very little else, one might as well dig holes and fill them up and achieve nothing in the long run. In that case the scheme might temporarily help a lucky section of the poor receiving aid, but as soon as the project is discontinued and aid is withdrawn, the village economy will settle back to its old, low-level equilibrium.

Even the short-run beneficial effects are suspect. In the past we had a multitude of poverty removal projects, but due to an awful delivery mechanism a very tiny fraction of the incurred expenditure actually reached the deserving. There is no reason to believe that overnight there has been a fundamental shift in the state of things. We are, therefore, left only with the na?ve Keynesian hope of generating demand for the economy through this colossal project. But that hope is indeed too na?ve to be taken seriously. Among other things, due to various supply rigidities, such huge expenditure without any significant change in the supply side is likely to be inflationary.

Of course, one can view the scheme as yet another gimmick to surreptitiously dole out political favours. Though such a possibility can never be ruled out, one may still take a positive attitude and mention that from a purely economic perspective, the scheme certainly has the potential of building up the supply side of the rural economy. If properly used, it can provide the rural poor with valuable skills, training and work environment which in turn are vital for building up rural productivity in the long run. It is time we shifted our focus from short-run political benefits to the long-run health of the economy.