General Equilibrium Effects of (Improving) Public Employment Programs: Experimental Evidence from India

Abstract

Public employment programs play a large role in many developing countries' anti-poverty strategies, but their net impact on the incomes of the poor will depend on both direct program earnings as well as indirect effects through changes induced in market wages and employment. We estimate this composite effect, exploiting a large-scale randomized experiment across 157 sub-districts and 19 million people that substantially improved the implementation of India's rural employment guarantee scheme. Despite no changes in government expenditure on the program itself, the earnings of low-income households rose 13%, driven overwhelmingly by market (90%) as opposed to program earnings (10%). Low-skilled wages increased 6% and days without paid work fell 7%, while migration and prices were unaffected. Effects on wages, employment, and income also spilled over into neighboring sub-districts, and estimates of program impact that adjust for these spillovers are substantially larger, typically double the unadjusted magnitudes. These results suggest that well-implemented public works programs can be highly effective at reducing poverty. They also highlight the importance of general equilibrium effects in program evaluation, and the feasibility of studying them using large-scale experiments.