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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 Singaporeushakri@yahoo.com
Shashwat Alok*
Affiliation:
Indian School of Business
Yakshup Chopra
Affiliation:
Washington University in St. Louisyakshup.chopra@wustl.edu
Prasanna Tantri
Affiliation:
Indian School of Businessprasanna_tantri@isb.edu
*
shashwat_alok@isb.edu (corresponding author)
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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

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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.

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