We find that this reform had a large impact on the earnings of low-income households, and that these gains were overwhelmingly driven by higher private-sector earnings (90%) as opposed to earnings directly from the program (10%). These earnings gains reflect a 5.7% increase in market wages for rural unskilled labor, and a similar increase in reservation wages. We do not find evidence of distortions in factor allocation, including labor supply, migration, and land use.
The (unaccepted) success of MNREGS
MNREGS aims to provide 100 days of employment to the poor in villages. Anyone who needs employment can register, work, and get paid. It thus provides employment security. There were concerns about its effects before the roll out of the scheme, some of which may be genuine. However, after several years, even after the evidence has emerged of its success, it's still being criticised in the face of stark evidence.
It may not be possible to go through the entire literature on MNREGS here. Livemint has a good overview of the evidence on MNREGS.
The summary is that many of the concerns raised about MNREGS are unfounded or not significant. MNREGS didn't have significant impact on food inflation, as argued by its opponents. It didn't result in reduction of employment. The argument of "digging holes" is also weak since quality assets were built in many areas. The fears of "everyone lining up for work and government running out of resources" proved to be unfounded.
One important criticism was the feasibility of implementation. It is argued that a policy is as good as its implementation. Since, MNREGS implementation isn't good, the policy is a failure. This is a simplistic argument. It fails to differentiate between the implementation challenges due to structural infeasibility and implementation challenges due to lack of political will.
Implementation infeasibility due to structural factors is a case where it is theoretically infeasible to implement certain policy. For instance, if the policy is to replace all the cash in the economy within 1 day, it is theoretically infeasible due to structural reasons. Implementing MNREGS does not come under this category. Its implementation depends on the political will. Lack of implementation due to lack of political will should not be pointed as failure of the policy. If lack of political will is pointed out as the failure of the policy then every government policy is a failure and undesirable.
The evidence for MNREGS being an implementable policy comes from Andhra Pradesh. Andhra Pradesh introduced biometric smart cards to disburse payments. A large scale RCT in erst while Andhra Pradesh with 19 million people as sample has proved that introducing smart cards has significantly reduced leakage and streamlined the process.
This is a defence against the counter arguments to MNREGS. There is evidence on its benefits too.
MNREGS had huge positive impacts on incomes, poverty rates, especially among women, SCs and STs. The more broad and rigorous evidence on positive effects of MNREGS comes from the RCT in Andhra Pradesh which evaluates the General Equilibrium effects of MNREGS. General Equilibrium effect is the effect of a particular policy on the economy as a whole. If a policy increased incomes of families in a particular village, it's a partial equilibrium effect. It may have happened that families in other villages might have lost incomes due to this intervention. General Equilibrium effects take all such effects into account.
The General Equilibrium effect of MNREGS suggests that MNREGS improved incomes without affecting the employment. The paper says
The important effect is that it raised wages of people not just during the employment season but also during other seasons. Some argued earlier that since MNREGS works are only during a particular season, the bargaining power wouldn't spill over to other seasons and hence wouldn't have effect on wages. In fact, only 10% of increased income is due to MNREGS. The rest 90% increase is due to workers' higher wages in non MNREGS season, a result of their increased bargaining power.
MNREGS's lack of effect on employment is an important piece of evidence because the common concern was that MNREGS wages would make people demand higher wages. It would make it difficult for local businesses to recruit people and hence businesses will close down hurting the very poor. It doesn't turn out to be so. There can be two reasons for this. One, the markets were monopolistic earlier. Making industries pay a little more didn't hurt them much. Two, the assets built through MNREGS made businesses more productive which helped them to afford higher wages. The paper says that they can't confirm the mechanisms but the overall effect is that MNREGS didn't have any effect.
The other way to look at it is that MNREGS set the wage floor in the market. It indirectly did the work of setting minimum wage without the big trouble of enforcement as is the case with minimum wage rules. Not to mention, it didn't affect the employment. Nor did it cause inflation.
The other argument is that the government should pursue cash transfers instead of MNREGS. It's a weird argument because MNREGS also pays cash and not in kind. So, the case of replacing it with cash transfers doesn't arise. Further, MNREGS has significant advantages over cash transfers. One, MNREGS acts as a fulcrum to increase the wage levels by increasing workers' bargaining power. As seen earlier, the 90% income increase is due to increase in bargaining power even during the non MNREGS season. Cash transfers doesn't act through that mechanism and hence would lose out on the 90% of the effect. Two, MNREGS works on self selection mechanism. One needn't take pains of identifying beneficiaries. Cash transfers includes this additional work. Three, assets are created through MNREGS, which isn't a case with cash transfers. So, not just seen in isolation, MNREGS is preferable even if it's seen in comparison with cash transfers.
There are also second order effects of MNREGS - women empowerment, inculcating the culture of participatory governance at grass root level etc. The debate on this gets messy because they are difficult to quantify and also diverts from the stated objective, which leads to long arguments. However, it is important to note these effects.
Seen anyway, MNREGS seems to have been very successful. Despite this evidence, people still cling on to their criticism of MNREGS making same old arguments. The success of MNREGS remains under appreciated or unaccepted.