Labor Market Effects of Inconsistent Policy Interventions: Evidence from India's Employment Guarantees
Recent evidence suggests that large employment guarantee schemes in India have increased private wages. Juxtaposed with this body of work are studies that show how the lack of administrative capacity, political will, and other supply factors cause program provision to be rather limited and highly variable across districts and over time. This paper attempts to understand the cost of variability in program provision in terms of the labor market outcomes. We find that in the presence of downward wage rigidity, forward looking employers compress wage increases today because of the uncertainty regarding the level of program provision in the future. Our theory generates two key empirically verified predictions: (i) greater variability in program provision results in a larger compression of wage increases; and (ii) that compression of wage increases is more severe in districts where inflation is low relative to where inflation is high. This has important policy implications as we show that by simply reducing the variability in program provision, without increasing the average expenditure, can be welfare enhancing.