Provide Incentives to Employment

Dr Bharat Jhunjhunwala
Prime Minister Modi has asked the Rural Development Ministry to dovetail MNREGA with irrigation and housing schemes. The Government has also abandoned its plan to reduce the applicability of the scheme. Presently MNREGA is applicable to all 6500 blocks of the country. It was proposed to reduce its scope to the 2500 backward blocks. That would  put many poor outside the scope of the scheme. The Government has abandoned the idea of reducing scope of the scheme and it will continue to operate in all the 6500 blocks of the country. Both these decisions should be welcomed.
Poor people have certainly got relief by getting 100 days employment under MNREGA. Migration to the cities has reduced. Farmers in Punjab are finding it difficult to get labour from Bihar because they have some alternative employment available under MNREGA near their homes. The wage rates for agricultural labour have shown a dramatic increase after implementation of MNREGA. The daily wages rose from Rs 120 per day to Rs 250 in Uttarakhand over a period of two years soon after MNREGA was implemented.
However, there are long term problems with MNREGA which need to be taken on board. On first sight, MNREGA appears to be along Gandhiji’s thinking. The Mahatma had said that he would rather give jobs to the naked instead of clothes. But ‘jobs’, for Gandhiji, meant commercial market-driven employment, not doles given out under MNREGA. Under commercial employment, the farm hand produces wheat that is sold in the market. Both the worker and the employer are not dependent upon government assistance in undertaking this activity. Such employment empowers the workers. They can stand up and demand their rights from the Government because their livelihood is not dependent upon the government. The Government gains as well. The industrialist pays taxes on the goods produced. Such employment is a win-win proposition for all concerned. The worker gets income, the employer makes profits and the government collects taxes. Such employment is sustainable.
Employment generated under MNREGA stands on altogether different footing. The government first imposes tax on businesses to collect taxes. Some businesses fold up due to these taxes. Others businesses are not established because they are unable to pay the high wages. Farmers in Kerala, for example, have shifted from labour-intensive paddy cultivation to labour-extensive banana cultivation. Such shifts lead to less generation of employment as well as production. That leads to increase in the number of unemployed and more demand for relief under MNREGA. Businesses have to face two pressures from MNREGA-higher taxes and higher wages. In this way a regressive cycle of increasing taxes, increasing wages and reducing commercial employment is established.
Furthermore there is a huge problem of leakages. The relief is reached to the people through government bureaucracy. One Village Pradhan told this writer that officials gave approval only to such schemes for which they could collect commissions on materials. For example, officials would approve the making of a holding wall along a river dam even though it may be useless because they can collect commission of the wire net supplied. They would not approve making of trenches for ground water recharge because no material is required to be supplied for this work.
The fate of unemployment compensation programmes in western countries confirms these observations. Nobel Laureate Prof Edmund Phelps says: “Although such programs have been substantial in Europe and the US, the working poor remain as marginalized as ever. Indeed, social spending has worsened the problem, because it reduces work incentives and thus creates a culture of dependency and alienation from the commercial economy, undermining labor force participation, employability, and employee loyalty.” The alternative according to Prof Phelps is like this: “The best remedy is a subsidy for low-wage employment, paid to employers for every full-time low-wage worker they hire and calibrated to the employee’s wage cost to the firm. The higher the wage cost, the lower the subsidy, until it has tapered off to zero. With such wage subsidies, competitive forces would cause employers to hire more workers, and the resulting fall in unemployment would cause most of the subsidy to be paid out as direct or indirect labor compensation. People could benefit from the subsidy only by engaging in productive work.”
One argument given in favour of MNREGA is that it enhances the bargaining power of the workers even if it does not create commercial employment. Workers from Bihar may demand Rs 300 per day from farmers of Punjab instead of Rs 200 previously because they now have Rs 100 available to them in their home under MNREGA. This is true. But such bargaining does not help in the long run. Workers of textile mills of Mumbai demanded high wages under the leadership of Datta Samant. The result was that the textile industry moved to Surat. Many factories were relocated outside Bengal because the State Government looked the other way when the workers staged gherao of the employers to demand higher wages. The import is that workers may get high wages today but tomorrow the job itself may go. We can see this happening in the United States today. Automakers are going bankrupt because workers are not willing to accept lower wages. This benefit of MNREGA is loud and clear but it has led to increase in labour costs in all sectors of the economy and ultimately has hit at employment generation.
Another argument in favour of MNREGA is that it has led to improvement in nutrition and rural consumption. This benefit is laudable. The question is whether the same increase can be obtained by alternative strategies so that the disincentive to generation of employment can be removed.
The way forward it to implement an employment subsidy scheme while redesigning MNREGA. The Government could pay, say, Rs 500 per month towards the salary of each worker employed in a factory or a farm. Or the Government could pay both the employees’ and employers’ contribution to Provident Fund for all employees. Or the Government could impose high taxes on job-eating machines like the harvesters and excavators. Such policies would lead to increase in the cost of machines and decrease in the cost of labour. Farmers and industrialists will use less machines and more labour. The consequent increase in commercial activity will generate taxes for the Government and the expenditures made on subsidies will be partially recouped. A fortuitous cycle of reduced labour cost, increased commercial activity and higher collection of taxes will be established. The strategy of dovetailing MNREGA with irrigation and housing schemes is half-step in the right direction. Such approach will lead to improvement in the benefits to be reaped from the scheme but these will still keep the discourse within the ambit of government provision of employment. The task is to rev up the market to create jobs.

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