Hostname: page-component-cd9895bd7-fscjk Total loading time: 0 Render date: 2024-12-23T19:44:53.121Z Has data issue: false hasContentIssue false
  • English
  • Français

Government Employment Guarantee, Labor Supply, and Firms’ Reaction: Evidence from the Largest Public Workfare Program in the World

Published online by Cambridge University Press:  08 April 2020

Sumit Agarwal Open the ORCID record for Sumit Agarwal [Opens in a new window] ,
Shashwat Alok ,
Yakshup Chopra  and
Prasanna Tantri
Sumit Agarwal
Affiliation:
National University of [email protected]
Shashwat Alok*
Affiliation:
Indian School of Business
Yakshup Chopra
Affiliation:
Washington University in St. [email protected]
Prasanna Tantri
Affiliation:
Indian School of [email protected]
*
[email protected] (corresponding author)
Get access Rights & Permissions [Opens in a new window]

Abstract

Using establishment-level data, we examine the impact of the Indian government’s employment guarantee program on labor and firm behavior. We exploit the staggered implementation of the program for identification and find that the program led to a 10% reduction in the permanent workforce in firms. Firms responded to the adverse labor-supply shock by resorting to increased mechanization. This significantly increased the firms’ cost of production, leading to a decline in net profits and productivity. These effects manifested primarily in firms paying low wages, firms having low labor productivity and greater sales volatility, and firms located in states with pro-employer labor regulations.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 56 , Issue 2 , March 2021 , pp. 409 - 442
Copyright
© The Author(s), 2020. Published by Cambridge University Press on behalf of Michael G. Foster School of Business, University of Washington

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

We thank Sudheer Chava (the referee) and Jarrad Harford (the editor) for valuable feedback. We thank Viral Acharya, Maitreesh Ghatak, Radhakrishnan Gopalan, Ravi Jagannathan, John Leahy, Nagpurnanand Prabhala, Rui Silva, and Jianhuan Xu and the participants at the 2017 Indian School of Business (ISB) Summer Research Camp, 2017 Asian Bureau of Finance and Economic Research (ABFER) Conference, 2017 New York University (NYU) Conference, and 2018 European Finance Association (EFA) for their helpful comments. We thank Aditya Murlidharan for his excellent research assistance. We gratefully acknowledge the support from the Center for Analytical Finance of the Indian School of Business for providing the data and the necessary financial assistance for this project.

References

Aaronson, D.; French, E.; and MacDonald, J.. “The Minimum Wage, Restaurant Prices, and Labor Market Structure.” Journal of Human Resources, 43 (2008), 688–720.CrossRefGoogle Scholar
Aaronson, D.; French, E.; Sorkin, I.; and T. To. “Industry Dynamics and the Minimum Wage: A Putty-Clay Approach.” International Economic Review, 59 (2018), 51–84.CrossRefGoogle Scholar
Acemoglu, D. “Equilibrium Bias of Technology.” Econometrica, 75 (2007), 1371–1409.CrossRefGoogle Scholar
Acemoglu, D. “When Does Labor Scarcity Encourage Innovation?” Journal of Political Economy, 118 (2010), 1037–1078.CrossRefGoogle Scholar
Acemoglu, D., and Finkelstein, A.. “Input and Technology Choices in Regulated Industries: Evidence from the Health Care Sector.” Journal of Political Economy, 116 (2008), 837–880.CrossRefGoogle Scholar
Acemoglu, D., and Guerrieri, V.. “Capital Deepening and Non-Balanced Economic Growth.” Journal of Political Economy, 116 (2008), 467–498.CrossRefGoogle Scholar
Acharya, V. V.; Baghai, R. P.; and Subramanian, K. V.. “Labor Laws and Innovation.” Journal of Law and Economics, 56 (2013), 997–1037.CrossRefGoogle Scholar
Agarwal, S.; Prasad, S. P.; Sharma, N.; and Tantri, P. L.. “A Friend Indeed: Does the Use of Biometric Digital Identity Make Welfare Programs Counter Cyclical?” Working Paper, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3201746 (2018).Google Scholar
Aghion, P.; Burgess, R.; Redding, S. J.; and Zilibotti, F.. “The Unequal Effects of Liberalization: Evidence from Dismantling the License Raj in India.” American Economic Review, 98 (2008), 1397–1412.CrossRefGoogle Scholar
Agrawal, A. K., and Matsa, D. A.. “Labor Unemployment Risk and Corporate Financing Decisions.” Journal of Financial Economics, 108 (2013), 449–470.CrossRefGoogle Scholar
Alok, S., and Ayyagari, M.. “Politics, State Ownership, and Corporate Investment.” Review of Financial Studies, 33 (2020), 3031–3087.CrossRefGoogle Scholar
Alok, S.; Chaurey, R.; and Nukala, V.. “Creditor Rights, Threat of Liquidation, and Labor-Capital Choice of Firms.” Working Paper, Indian School of Business (2018).CrossRefGoogle Scholar
Alok, S., and Krishnamurthy, S.. “Employee Property Rights and Innovation.” Working Paper, Indian School of Business (2017).Google Scholar
Arulampalam, W.; Dasgupta, S.; Dhillon, A.; and Dutta, B.. “Electoral Goals and Center-State Transfers: A Theoretical Model and Empirical Evidence from India.” Journal of Development Economics, 88 (2009), 103–119.CrossRefGoogle Scholar
Auerbach, A. J.; Gale, W. G.; and Harris, B. H.. “Activist Fiscal Policy.” Journal of Economic Perspectives, 24 (2010), 141–163.CrossRefGoogle Scholar
Bai, J. J.; Fairhurst, D.; and Serfling, M.. “Employment Protection, Investment, and Firm Growth.” Review of Financial Studies, 33 (2020), 644–688.CrossRefGoogle Scholar
Banerjee, A., and Chiplunkar, G.. “How Important Are Matching Frictions in the Labour Market? Experimental and Non-Experimental Evidence from a Large Indian Firm.” Working Paper, available at https://gauravchiplunkar.com/wp-content/uploads/2018/08/matchingfrictions_banerjeechiplunkar_aug18.pdf (2018).Google Scholar
Banerjee, A., and Duflo, E.. “Do Firms Want to Borrow More? Testing Credit Constraints Using a Directed Lending Program.” Review of Economic Studies, 81 (2014), 572–607.CrossRefGoogle Scholar
Banerjee, A. V., and Duflo, E.. “The Economic Lives of the Poor.” Journal of Economic Perspectives, 21 (2007), 141–167.CrossRefGoogle Scholar
Banerjee, A.; Duflo, E.; Imbert, C.; Mathew, S.; and Pande, R.. “E-governance, Accountability, and Leakage in Public Programs: Experimental Evidence from a Financial Management Reform in India.” NBER Working Paper No. w22803 (2016).CrossRefGoogle Scholar
Belo, F.; Lin, X.; and Bazdresch, S.. “Labor Hiring, Investment, and Stock Return Predictability in the Cross Section.” Journal of Political Economy, 122 (2014), 129–177.CrossRefGoogle Scholar
Bena, J., and Simintzi, E.. “Machines Could Not Compete with Chinese Labor: Evidence from U.S. Firms’ Innovation.” Working Paper, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2613248 (2019).Google Scholar
Benmelech, E.; Bergman, N. K.; and Seru, A.. “Financing Labor.” NBER Working Paper No. w17144 (2015).CrossRefGoogle Scholar
Bertrand, M.; Hsieh, C.; and Tsivanidis, N.. “Contract Labor and Firm Growth in India.” Mimeo, (2015).Google Scholar
Bertrand, M., and Mullainathan, S.. “Executive Compensation and Incentives: The Impact of Takeover Legislation.” NBER Working Paper No. w6830 (1998).CrossRefGoogle Scholar
Besley, T., and Burgess, R.. “Can Labor Regulation Hinder Economic Performance? Evidence from India.” Quarterly Journal of Economics, 119 (2004), 91–134.CrossRefGoogle Scholar
Besley, T., and Coate, S.. “Workfare versus Welfare: Incentive Arguments for Work Requirements in Poverty-Alleviation Programs.” American Economic Review, 82 (1992), 249–261.Google Scholar
Calonico, S.; Cattaneo, M. D.; and Titiunik, R.. “Robust Nonparametric Confidence Intervals for Regression-Discontinuity Designs.” Econometrica, 82 (2014), 2295–2326.CrossRefGoogle Scholar
Chambers, R. G. “Workfare or Welfare?” Journal of Public Economics, 40 (1989), 79–97.CrossRefGoogle Scholar
Chaurey, R. “Labor Regulations and Contract Labor Use: Evidence from Indian Firms.” Journal of Development Economics, 114 (2015), 224–232.CrossRefGoogle Scholar
Chava, S.; Oettl, A.; and Singh, M.. “Do Minimum Wage Increases Cause Financial Stress to Small Businesses? Evidence from 15 Million Establishments.” Research Paper No. 19–13, Georgia Tech (2018).CrossRefGoogle Scholar
Chen, X., and Nordhaus, W. D.. “Using Luminosity Data as a Proxy for Economic Statistics.” Proceedings of the National Academy of Sciences, 108 (2011), 8589–8594.CrossRefGoogle ScholarPubMed
Cho, D. “Downward Wage Rigidity and Corporate Investment.” Working Paper, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2839385 (2016).CrossRefGoogle Scholar
Cole, S. A. “Fixing Market Failures or Fixing Elections? Agricultural Credit in India.” Working Paper, Harvard Business School (2008).CrossRefGoogle Scholar
Dinç, I. S., and Gupta, N.. “The Decision to Privatize: Finance and Politics.” Journal of Finance, 66 (2011), 241–269.CrossRefGoogle Scholar
Doornik, B. V.; Fazio, D.; Schoenherr, D.; and Skrastins, J.. “Unemployment Insurance as a Subsidy to Risky Firms.” Working Paper, available at https://ssrn.com/abstract=3466314 (2019).CrossRefGoogle Scholar
Dougherty, S.; Frisancho, V. C. R.; and Krishna, K.. “Employment Protection Legislation and Plant-Level Productivity in India.” NBER Working Paper No. w17693 (2011).CrossRefGoogle Scholar
Draca, M.; Machin, S.; and Van Reenen, J.. “Minimum Wages and Firm Profitability.” American Economic Journal: Applied Economics, 3 (2011), 129–51.Google Scholar
Drèze, J. “Famine Prevention in India.” The Political Economy of Hunger, 2 (1990), 13–122.Google Scholar
Duchin, R.; Ozbas, O.; and Sensoy, B. A.. “Costly External Finance, Corporate Investment, and the Subprime Mortgage Credit Crisis.” Journal of Financial Economics, 97 (2010), 418–435.CrossRefGoogle Scholar
Ellul, A.; Pagano, M.; and Schivardi, F.. “Employment and Wage Insurance within Firms: Worldwide Evidence.” Review of Financial Studies, 31 (2017), 1298–1340.CrossRefGoogle Scholar
Ersahin, N., and Irani, R. M.. “Collateral Shocks and Corporate Employment.” Review of Finance, 24 (2020), 163–187.Google Scholar
Falato, A., and Liang, N.. “Do Creditor Rights Increase Employment Risk? Evidence from Loan Covenants.” Journal of Finance, 71 (2016), 2545–2590.CrossRefGoogle Scholar
Farre-Mensa, J., and Ljungqvist, A.. “Do Measures of Financial Constraints Measure Financial Constraints?” Review of Financial Studies, 29 (2016), 271—308.CrossRefGoogle Scholar
Favilukis, J.; Lin, X.; and Zhao, X.. “The Elephant in the Room: The Impact of Labor Obligations on Credit Markets.” American Economic Review, 110 (2020), 1673–1712.CrossRefGoogle Scholar
Fazzari, S. M.; Hubbard, R. G.; Petersen, B. C.; Blinder, A. S.; and Poterba, J. M.. “Financing Constraints and Corporate Investment.” Brookings Papers on Economic Activity, 1988 (1988), 141–206.CrossRefGoogle Scholar
Francesco, D.; Weber, M.; and Yang, S.. “Manpower Constraints and Corporate Policies.” Working Paper, available at http://hdl.handle.net/10419/168109 (2017).Google Scholar
Geng, H. G.; Huang, Y.; Lin, C.; and Liu, S.. “Minimum Wage and Corporate Investment.” Working Paper, available at https://dx.doi.org/10.2139/ssrn.3054453 (2018).CrossRefGoogle Scholar
Gopalan, R.; Hamilton, B. H.; Kalda, A.; and Sovich, D.. “State Minimum Wage Changes and Employment: Evidence from One Million Hourly Wage Workers.” Working Paper, Washington University in St. Louis (2018).CrossRefGoogle Scholar
Gustafson, M., and Kotter, J. D.. “Minimum Wage and Corporate Policy.” Working Paper, available at https://dx.doi.org/10.2139/ssrn.2914598 (2018).CrossRefGoogle Scholar
Hadlock, C. J., and Pierce, J. R.. “New Evidence on Measuring Financial Constraints: Moving beyond the KZ Index.” Review of Financial Studies, 23 (2010), 1909–1940.CrossRefGoogle Scholar
Harrison, A. E.; Martin, L. A.; and Nataraj, S.. “Learning versus Stealing: How Important Are Market-Share Reallocations to India’s Productivity Growth?” World Bank Economic Review, 27 (2013), 202–228.CrossRefGoogle Scholar
Henderson, V.; Storeygard, A.; and Weil, D. N.. “A Bright Idea for Measuring Economic Growth.” American Economic Review, 101 (2011), 194–199.CrossRefGoogle ScholarPubMed
Himmelfarb, G. “The Idea of Poverty.” History Today, 34 (1984).Google Scholar
House, C. L., and Shapiro, M. D.. “Phased-In Tax Cuts and Economic Activity.” American Economic Review, 96 (2006), 1835–1849.CrossRefGoogle Scholar
Imbens, G., and Kalyanaraman, K.. “Optimal Bandwidth Choice for the Regression Discontinuity Estimator.” Review of Economic Studies, 79 (2011), 933–959.CrossRefGoogle Scholar
Imbert, C., and Papp, J.. “Labor Market Effects of Social Programs: Evidence from India’s Employment Guarantee.” American Economic Journal: Applied Economics, 7 (2015), 233–263.Google Scholar
John, K.; Knyazeva, A.; and Knyazeva, D.. “Employee Rights and Acquisitions.” Journal of Financial Economics, 118 (2015), 49–69.CrossRefGoogle Scholar
Kaplan, S. N., and Zingales, L.. “Investment-Cash Flow Sensitivities Are Not Valid Measures of Financing Constraints.” Quarterly Journal of Economics, 115 (2000), 707–712.CrossRefGoogle Scholar
Katz, M. B. In the Shadow of the Poorhouse: A Social History of Welfare in America. New York, NY: Basic Books (1996).Google Scholar
Khemani, S. “Does Delegation of Fiscal Policy to an Independent Agency Make a Difference? Evidence from Intergovernmental Transfers in India.” Journal of Development Economics, 82 (2007), 464–484.CrossRefGoogle Scholar
Mao, Y., and Wang, J. J.. “Labor Scarcity, Finance, and Innovation: Evidence from Antebellum America.” Working Paper, Cornell University (2018).CrossRefGoogle Scholar
Meer, J., and West, J.. “Effects of the Minimum Wage on Employment Dynamics.” Journal of Human Resources, 51 (2016), 500–522.CrossRefGoogle Scholar
Merz, M., and Yashiv, E.. “Labor and the Market Value of the Firm.” American Economic Review, 97 (2007), 1419–1431.CrossRefGoogle Scholar
Morten, M. “Temporary Migration and Endogenous Risk Sharing in Village India.” Journal of Political Economy, 127 (2019), 1–46.CrossRefGoogle Scholar
Mueller, H. M.; Ouimet, P. P.; and Simintzi, E.. “Wage Inequality and Firm Growth.” American Economic Review, 107 (2017), 379–383.CrossRefGoogle Scholar
Muralidharan, K.; Niehaus, P.; and Sukhtankar, S.. “Building State Capacity: Evidence from Biometric Smartcards in India.” American Economic Review, 106 (2016), 2895–2929.CrossRefGoogle Scholar
Nichols, A. L., and Zeckhauser, R. J.. “Targeting Transfers through Restrictions on Recipients.” American Economic Review, 72 (1982), 372–377.Google Scholar
Niehaus, P., and Sukhtankar, S.. “Corruption Dynamics: The Golden Goose Effect.” American Economic Journal: Economic Policy, 5 (2013), 230–269.Google Scholar
Romer, P. M. “Capital, Labor, and Productivity.” Brookings Papers on Economic Activity, 1990 (1990), 337–367.CrossRefGoogle Scholar
Serfling, M. “Firing Costs and Capital Structure Decisions.” Journal of Finance, 71 (2016), 2239–2286.CrossRefGoogle Scholar
Siddhartha, A. V. “CAG Report on NREGA: Fact and Fiction.” Economic & Political Weekly, 43 (2008), 39–45.Google Scholar
Silva, R. “Internal Labor Markets, Wage Convergence and Investment.” U.S.Census Bureau Center for Economic Studies Paper No. CES-WP-13-26 (2017).Google Scholar
Simintzi, E.; Vig, V.; and Volpin, P.. “Labor Protection and Leverage.” Review of Financial Studies, 28 (2014), 561–591.CrossRefGoogle Scholar
Subbarao, K.; del Ninno, C.; Andrews, C.; and Rodríguez-Alas, C.. “The Design and Implementation of Public Works Programs: A Toolkit for Practitioners.” World Bank Series, (2010).Google Scholar
Topalova, P. “Factor Immobility and Regional Impacts of Trade Liberalization: Evidence on Poverty from India.” American Economic Journal: Applied Economics, 2 (2010), 1–41.Google Scholar
Supplementary material: PDF

Agarwal et al. Supplementary Materials

Agarwal et al. Supplementary Materials

Download Agarwal et al. Supplementary Materials(PDF)
PDF 194.7 KB