More on the impact of NREGS

This post is in continuation to the discussion, here and here, on the impact of higher NREGS wages on different types of farmers and the rural economy. In response to a comment in one of those posts, here is my conjecture of the impacts of NREGS.

Farmers with large land holdings
Rely on farm labor to till their lands. Therefore, will be affected by the increase in their wages. However, unlike those with mid-level holdings they may be able to afford the higher wages, though it will certainly affect their incomes. Their labor demand curve is relatively inelastic, and therefore are likely to experience a smaller labor deficit of only Q(mkt)-Q(nreg).



Farmers with mid-level holdings
Also rely on farm labor. Typically, they work on their fields alongside the farm labor. Are more sensitive to increases in labor wages, given their lower income profile. Their labor demand curve is more elastic and they will experience a substantial labor deficit of Q(mkt)-Q(nreg).



Small farmers who are willing to work under NREGS
They will get higher wages now. And their exit will reduce the supply of farm labor, thereby forcing up farm labor wages.

Small farmers who do not go to work under NREGA
The higher wages offered under the NREGS will incentivize them to defect to NREGS works. Even if they do not, they will still end up with higher farm wages arising from the decreased supply of farm labor due to the NREGS.

Viability of agriculture
The long term impact of the higher wages on agriculture output is likely to be minimal. In fact, it could be a much needed filip to boosting farm productivity. It needs to be borne in mind that our agriculture remains caught in a low productivity trap, arising partly from deficient capital investments (both government and farmers) and also incentive distortions (among both farmers and the agriculture labor).

Higher farm wages can incentivize large farms to become more productive by greater mechanization, more effective deployment of labor etc. This productivity effect could be more pronounced in the mid-level holdings, where farmers are more sensitive to higher wages. Higher food prices could also encourage and increase the efficiency of subsistence production.

Prices of agricultural output
I have blogged on this earlier here, "Since labour is a significant component of agriculture costs, any rise in this input cost will put upward pressure on foodgrain prices. Production costs will rise, and atleast a share of the increase will be passed on to the consumers by way of higher foodgrain prices."

Un-skilled construction workers
Another industry where the higher NREGS wages could have some effect is on the market for un-skilled construction workers, who are now typically paid Rs 60-100 per day, often at locations outside their villages and even in towns. They may find the local employment opportunities afforded by NREGS at similar or higher wages. There could be a consequent upward pressure on construction wages.

Mint too believes that "NREGS has created a wage-floor for an otherwise hapless pool of unskilled rural labourers" and that "higher farm costs from a decrease in labour supply are a reality in many parts of India".

Update 1
Shamika Ravi and Monika Engler examined the welfare impact of the National Rural Employment Guarantee Scheme (NREGS), as measured by the changes in expenditure level and physical and mental health indicators, and finds that the program has had a "significant impact in alleviating rural poverty".

It finds that food expenditures, which generally account for about 60% of total consumption, increases by 15% for the weaker section of the population, and the impact on food security increases with the vulnerability of the target group. Spending in non-food consumables and clothing increases by 40-50% among the less well off participants. Further, it also finds a significant decrease of emotional distress in the form of anxiety, tension, and worries, all of which contributes towards increasing the productivity of these individuals.

Update 1

The hypothesis that NREGA has drawn off people from far labor is not borne out (atleast) by the graphic below. The share of agricultural labor has remained more or less constant since the NREGA was introduced.



Update 2
Businessline writes, "While not impacting too much the medium and large farmers with other sources of income, the rural employment guarantee scheme has hit smaller and marginal farmers, for whom labour has become high-cost and scarce because of the NREGS".