Rural wage rates have been rising at quite a fast rate in recent months. Farmers have been complaining about their inability to get cheap labour for their farms. Industry, too, has raised the alarm saying that this is squeezing their margins; higher rural wages mean fewer people are willing to work on construction sites, where a slowdown implies lower output increases in steel, cement and even biscuits that are had by the construction workers during their tea break. What is behind this wage inflation? The accepted wisdom seems to be that the culprit is the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA).
A major objective of MGNREGA was to help agricultural labourers and marginal farmers during the lean season in agriculture. In rainfed, non-irrigated lands, there is often a gap of three to six months in agricultural activity, depending on the region. During the lean season, rural labour – more precisely, labour that works in agriculture otherwise – either has no jobs in the village or gets jobs that do not pay adequate wages for it to survive. So it migrates to the cities to find alternative employment. This, of course, disrupts its family life and has many other adverse social consequences. With the employment guarantee scheme, these labourers could stay back in the village during the lean season and eke out a living without having to temporarily move to the city.
Consider areas where there is agricultural activity throughout the year, that is, where there is irrigated land. These areas obtained cheap labour during the time when other areas, which depended on rain-fed agriculture (and no irrigation), had a lull in their activity. With MGNREGA, workers from non-irrigated regions do not find it in their interests to migrate to irrigated areas in the dry season. This raises wages during the dry season in areas where agricultural activity can go on throughout the year. It can also raise wages in the rain-fed areas if those who stayed back in their villages during the local lean season did jobs that paid less than minimum wages. Since the employment guarantee scheme offers minimum wages, labourers would opt for MGNREGA rather than something that paid less. So, the employment guarantee scheme can put an upward pressure on the wages. But observe that in both instances, since the job guarantee scheme pays nothing more than minimum wages, the pressure is built because a wage floor is created by the Act. Note, also, that this is only for 100 days in a 365-day year.
With growth, and India claiming that growth will eradicate poverty, it is difficult to understand the criticism against below-minimum wage earnings rising up to the level of the minimum and that too for only 100 days during the year. In other words, one must be able to argue that MGNREGA is raising wages above the minimum level and that too throughout the year. This argument is difficult to make if we believe in the other statement being made by those who oppose the employment guarantee scheme. They claim that it is a highly corrupt activity, and that the poor are either unable to access the rural employment guarantee scheme or never given their full entitlement. This could still lead to wage inflation only if the wages that were being paid to the migrant workers were very, very low to begin with; even when they receive less than their entitlement, or minimum wages, it is more than what they would have obtained without MGNREGA!
The next point to consider is how a 100-day minimum wage guarantee can affect the remaining 265-day wage. This can happen only if workers are so non-aspirational that once they get a minimum amount of money for 100 days, they reduce their supply for the remaining 265 days, forcing wages to rise. In other words, they are happy in their poverty and this brings back memories of something we have often heard — the poor are poor because they do not work.
Suppose we were to think a little differently and, most importantly, consistently. Suppose we said that growth is having an impact — there is a greater demand for employment in activities that were not available before. These new activities pay more than what farmers were willing to pay earlier and that is why labourers are moving out of agriculture. So, if old agriculture and old industry have to compete with these new activities, they have to pay higher wages or increase productivity. There is nothing more market-driven than our informal-sector labour market and it is silly to expect that we will have market reforms by keeping this market depressed. All that this points to is that both agriculture and industry need to innovate. For a start, they could share more of their revenue with labourers rather than with their managers. How come no one is saying that managerial compensation has increased much more than wages for a long time now?
Indeed, if the critics of corrupt practices are right, and those who blame MGNREGA for wage inflation are also right, then reducing corruption in the implementation of the employment guarantee scheme will actually lead to greater, not less, wage inflation!
The author is Research Director, India Development Foundation