What determines MGNREGA wages?


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Business Line : Opinion : What determines MGNREGA wages?

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What determines MGNREGA wages?
Sandip Sukhtankar

Wage increase is not passed on to MGNREGA workers in Odisha’s Koraput and Rayagada regions
Officials may pocket the wage increases, but the wage level in MGNREGA seems just enough to induce workers to turn up.
This year marks the sixth anniversary of the implementation of the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), India's landmark right-to-work programme. The Act guarantees 100 days of paid employment to every rural household in India (up to 850 million people), regardless of eligibility criteria, and establishes the government's flagship welfare programme with an allocated central government cost of Rs 401 billion (or US$8.9 billion) in 2010-11, which accounts for 3.6 per cent of government expenditures. The programme has many supporters as well as critics, with the former suggesting that it would transform rural areas, and the latter bemoaning large-scale graft.
Despite the debate, however, it is difficult to evaluate overall programme outcomes in a rigorous manner for a number of reasons. The fact that the programme exists in all rural districts in India and expanded to cover these areas in a relatively short timeframe leaves no comparison areas against which outcomes can be measured. Even if one were to use the staggered rollout of the programme and compare initial programme areas to later programme areas, the programme's scale very likely suggests that spillovers into the later areas are likely, biasing such comparisons.
Finally, since there are no selection criteria to select beneficiaries into the programme, comparing programme beneficiaries to non-beneficiaries would be subject to selection bias.
WAGE PASS-THROUGH
Does this mean that we should give up analysing such an important programme? Not necessarily. Perhaps a more fruitful, if narrower, approach is to analyse changes in programme parameters in particular States. A number of such analyses exist, some of which are helpfully compiled on MGNREGA's website. With my co-author Paul Niehaus, I have analysed the effects of one such policy change: an increase in statutory daily wages in Odisha from Rs 55 to Rs 70 that took place on May 1, 2007.
Wages are, of course, the key policy parameter in MGNREGA, and getting them right is important for both fiscal reasons, as well as to prevent market distortions. When policymakers increase wages, they know that not all of this wage increase will be passed on to workers; some will be captured by local officials. How much of the increase passes through, and more pragmatically, what determines how much gets through and how much is lost, are questions which policymakers ought to truly explore to get the right answers.
The evidence from Koraput, Rayagada and Gajapati districts in Odisha is somewhat depressing. Our original data from a large-scale survey of almost three thousand households reveals that none of the wage increase passed through. While

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Business Line : Opinion : What determines MGNREGA wages?

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official records report that paid wages increased from Rs 55 to close to Rs 70 on average, our household interviews didn't corroborate this increase.
Although prior to the wage change households received close to the statutory wage of Rs 55 per day, after the change, actual wages didn't increase at all. Our data help rule out simple explanations for the absence of wage pass-through. For example, it isn't that households simply weren't aware of the wage change, as 72 per cent did, nor is this “zero result” related to noisy data or simply a short-run equilibrium.
There are, of course, some important caveats to keep in mind while interpreting these results. The area we studied is fairly remote and known to be relatively corrupt, and our data — from mid-2007 — encompass what might be considered early days of the programme. Yet, the lessons that we learned from digging deeper into the causes of the absence of pass-through may be applicable elsewhere.
VOICE AND EXIT
Building off the seminal work of Hirschman, we examined two potential drivers of wages on MGNREGA in the presence of incomplete monitoring of officials: voice and exit. In our context, households have two potential responses if they aren't paid the statutory wages prescribed by the government: they can complain or protest (ie, “voice”), or they can simply not work on the programme and seek employment elsewhere (ie, “exit”).
Our results are inconsistent with ‘voice' being effective in guaranteeing payments to workers. If officials were indeed paying workers what they were owed to keep them from complaining, then an increase in the statutory wage would make complaining even more worthwhile, and hence we would expect to see large parts of this increase passed on to workers. The fact that complaints are ineffective will not surprise anyone familiar with this area. While MGNREGA includes formal mechanisms for submitting complaints, in practice these may not work, especially in poor tribal areas like the one we studied.
Although 36 per cent of our respondents reported problems while working, only 7 per cent said that they would try and resolve the problem by complaining to higher-up officials. Fifty-three per cent cited that the reason for this inaction were the costs of complaining, as workers have to travel far to block or district offices in an area with limited public transportation. Thirty-seven per cent cited the likelihood that their complaint would not succeed, given that it would often be the case of the officials' word against the worker's.
Why, then, were officials paying close to the statutory wage of Rs 55 prior to the change? The answer is that workers do have one source of bargaining power — exit — whereby they can simply not choose to work on MGNREGA. Officials prefer that at least some workers participate in the programme, as it allows them to capture further rents from over-reporting work (i.e. if someone shows up for one day, they say he showed up for two days and pocket the extra money; it's much easier to do this than to say someone showed up for one day when he didn't show up at all).
WAGE DETERMINANTS
In this scenario, officials pay workers just enough — equal to the worker's outside option — to induce them to work. We test the exit hypothesis by using village endowments of land and labour; workers' outside options should be lower in places with relatively more labour to land, while MGNREGA wages shouldn't, because they are set at a statutory rate and shouldn't respond to labour surplus/demand.
Indeed, we find that programme wages received by workers were higher in labour-scarce places, suggesting that the ability to exit increases workers' bargaining power, and thereby drives programme wages. Moreover, despite the controversy on MGNREGA driving up local wages and reducing labour supply for farmers during agricultural seasons, in this scenario, we find that they merely respond to, rather than set, local wages.
The silver lining in all of this is that where NGOs are active, workers get more of the wage increase. Of course, this may simply be a correlation; perhaps, there is some omitted factor related to where NGOs work that determines the increased pass-through, not NGOs themselves. But perhaps, NGOs make workers' complaints more effective, suggesting that strengthening workers' voices might have some payback.
AADHAAR IMPACT
Technological solutions — for example, electronic benefit transfers connected to biometrically-authenticated IDs such

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Business Line : Opinion : What determines MGNREGA wages?

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as Aadhaar — are often suggested as a mechanism that might improve the effectiveness of MGNREGA wage payments. Karthik Muralidharan, Paul Niehaus, and I are conducting a randomised control trial to determine the effect of Smartcards on MGNREGA payments in Andhra Pradesh, with full support from the state government. Results from such experiments will help tell us if workers on the programme can eventually hope to receive their fair due.
(The author is an Assistant Professor in the Department of Economics at Dartmouth College.)
This article is by special arrangement with the Centre for the Advanced Study of India, University of Pennsylvania
(This article was published on April 10, 2012)
Keywords: INDIA IN TRANSITION, wage increases, MGNREGA, induce workers to turn up

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What determines MGNREGA wages?