MNREGA Is Not Making India's Workforce Less Skilled – Here's Why

MNREGA acts as a safety net not only against extreme poverty but also against the exploitation of workers.

The Mahatma Gandhi National Rural Employment Guarantee Act (MMNREGA) and its impact on the various aspects of the economy continues to be an active area of research. A piece by Sumit Agarwal, Shashwat Alok, Yakshup Chopra and Prasanna L. Tantri titled “Is MGMNREGA destroying factory jobs? Disquieting data shows it discourages skill development” published in the Times of India and the Economic Times on January 3, 2017, claims that MNREGA has had an adverse impact on skill development and industrial production in India.

Their main findings are that MNREGA caused a decline in the number of factory jobs and increased mechanisation in manufacturing due to a decrease in labour supply. They also suggest that this effect was restricted to factories with low wages, low productivity and pro-employer regulation. These are based on a reasonably well done econometric analysis.

However, based on these findings, the authors make extremely problematic claims that tread on slippery ground. In fact, plausible inferences can be drawn from authors’ own research to oppose their claims.

The first claim is that “MGMNREGA may be turning skilled factory workers into unskilled pit fillers”. For this to be valid, it is necessary that the factory jobs that workers left required more skill than MNREGA work. However the authors’ own research suggests the exact opposite. Note that, according to their findings, it is only the factories that pay low wages and have low-productivity that see factory workers leaving. More productive workers don’t leave factory jobs for MNREGA. The authors establish this explicitly in their research when they say that “highly skilled workers who produce large per capita output are unlikely to opt out of factory work for MMNREGA”. It is very surprising that what the authors’ claim in their article contradicts what they state in their working paper.

Contrary to this claim, MNREGA does not have any adverse impact on skill development. Skilled and highly paid workers don’t leave their factory jobs for MNREGA. Only the workers who are paid less in factories with low productivity with pro-employer regulations leave their factory jobs for MNREGA. In fact, this could be taken as evidence of effective self-selection in MNREGA where only the workers getting low wages, who work in what are possibly in dire conditions, find it worthwhile to leave their jobs. Since the workers voluntarily choose to leave factory work, by revealed preference, it can be inferred that this leads to an increase in their welfare in the short-run. Without any further comparative details of work and wages in the low-pay, low-productivity factory jobs with regard to MNREGA work, it is hard to arrive at the conclusion about de-skilling that the authors do.

The second claim is that factories are unable to cope with the MNREGA labour shock, are forced out of business, thus negatively impacting the Make in India initiative.

In making this erroneous claim, the authors ignore the second part of their research findings – the effect of MNREGA was restricted to factories with low wages, low productivity and pro-employer regulation. Low wages and pro-employer regulations in these factories indicate the possibility of worker exploitation, where workers have to make do with low wages in dire working conditions due to lack of any alternative options. That workers choose to leave these factories, for a meagre minimum wage for 100 days – even lower in reality – speaks of the working conditions in these places. These unproductive and exploitative factories are unlikely torch-bearers of the Make in India initiative. By providing an alternative, not only has MNREGA worked as a safeguard for workers working in such factories, but has also nudged these enterprises to increase productivity through mechanisation and employ more skilled labour, and provide better working conditions. That MNREGA hits those industries which are not able to increase productivity and pay better wages is surely a desirable outcome. It ensures that Make in India does not become a race to the bottom where factories compete solely by cutting wages and living standards of workers.

The authors’ prejudices against MNREGA become clear when one notices their repeated characterisation of MNREGA as “effortless” “pit filling”. Regarding their view on the amount of effort required in MNREGA works, we can only extend an invitation to the authors to come and visit a MNREGA site with us and see it for themselves. The description of MNREGA as “pit filling” is also grossly incorrect and without any evidence. In fact, studies have shown that MNREGA has created several durable assets in rural areas which includes land development, flood control and protection, drought-proofing  and water conservation and water harvesting works.

We have shown that even if one accepts these findings, the claims that they make in their article don’t follow. However, the findings themselves are questionable. The authors contend that the decline in number of workers is a phenomenon driven by supply side factors in labour markets. This is based on a claim about labour market rigidities, established by selectively citing studies such as Timothy Besley and Robin Burgess. The authors conveniently ignore the existence of a wealth of literature pointing in the opposite direction. Aditya Bhattacharjea questions the robustness of these findings by highlighting crucial errors in methodology. Atul Sood and others also questioned the rigid-labour-laws discourse, pointing towards weak enforcement of pro-worker regulations. Agarwal shows, using ASI data, that there was no significant movement in wages in this time period and in particular, there was no downward movement. The wage trends depicted by ASI may hold little relevance for MMNREGA workers, a majority of whom may be engaged in the informal sector, which is outside the ambit of the ASI. This calls for a thorough revision of the claim that the decline in factory jobs is supply driven. News reports of labour layoffs abound, evidence of increasing job insecurity establishes that the decline in the number of workers is in fact an artefact of falling labour demand.

We find that the article by Agarwal et al lacks an understanding of processes that underlie the data. To look beyond a prejudiced view of MNREGA calls for a vision that recognises MNREGA as a safety net not only against extreme poverty but also against exploitation of workers by providing a suitable alternative. MNREGA’s self-selection aspect ensures that skilled workers don’t leave factory jobs and hence there is no evidence of an adverse impact on skill development.

Naman Garg and Aarushi Kalra are MA economics students at Delhi School of Economics.