NREGS and Bihar
There was an interesting piece in the Economic Times this week about migrant labour and its effects on the wider economy. Essentially, it said that the government’s National Rural Employment Guarantee Scheme (NREGS), about which I blogged a couple weeks ago, is causing a major change in the labour market. People from rural Bihar, who previously moved to cities in other parts of the country looking for work, are now staying in rural Bihar and finding employment through the scheme. This is significant because many of those migrant workers have been in the construction sector, working in real estate and infrastructure. Indeed, they have made up about half of the labour force in that sector throughout India in recent years. They moved from areas where there were not enough jobs to areas where there were not enough workers, and were a valuable addition to those labour forces.
This is precisely what free-market economics would predict. Where these sorts of imbalances exist, the market will bring about an alignment of supply and demand. There was a large supply of labour in Bihar, but low demand for it, so people moved to areas where the demand was higher. In those areas, they could make higher wages than they would have at home and were a much needed resource in their new communities. It was a beautiful balancing act that seemingly magically happened all on its own. Truly remarkable.
And then the government intervened. The intention of the NREGS was good — to provide jobs to rural workers. Of course jobs are desirable. All of us want people to have access to employment. But the consequences have been much more far-reaching than bureaucrats ever expected and, as is so often the case, the unintended consequences of government policy have not been universally positive.
The problem is this: all those workers who are now staying in Bihar were previously finding employment in other parts of India, particularly as builders. Now that they are not part of that mobile labour force, the supply of builders in other parts of the country has gone down. This has made builders more expensive, which has caused the price of building houses, schools, hospitals, roads, and everything else, to go up. And if the price of building things goes up, then we will all feel it. It makes it more expensive to buy a house or send a child to school. It makes government building projects more expensive which means the government will need more money from all of us in taxes. And that is on top of the additional taxes we are already having to contribute to pay for the NREGS. We all end up paying more at every stage, and we do not get the right mix of labour in the various parts of the country. Bihar gets projects that are not really all that valuable and the rest of the country is left unable to build enough roads and homes. Everyone loses.
The Economic Times does not paint quite so bleak a picture. They claim it is actually just the face of rural development. But development is about meeting the needs of the country, using resources well, and building the sorts of industries that will sustain people’s employment over the long term. None of that is happening here. Instead, we are all, as taxpayers, paying to create short-term jobs in rural areas and diverting people — our most abundant and precious resource — from the areas where they could find longer term, more valuable employment. We will get less growth in infrastructure where it is most needed because there will not be enough workers to provide it. We will have to continue to subsidise employment in rural Bihar. Worst of all, we will condemn rural workers to lives spent on short government contracts at low wages rather than seeing them earn more money in more stable jobs as part of the building of India’s developing infrastructure.
This sort of thing happens a lot in economics. There are some consequences of actions that are immediately obvious. NREGS gives people jobs. Quick, easy, and pleasant. But there are often even greater consequences that are a little more difficult to see and take time to develop. The shortage of workers for the building of urban infrastructure is one such example. It has not happened overnight, but it has happened, and it causes problems even greater than the one that bureaucrats were attempting to solve.
Instead of manipulating markets in this way, the government should leave the market alone and let it operate. People will move to where the jobs are, new employers will move to places where there are rich supplies of labour. All of the pieces will slowly find themselves to the places where they best fit and the sorts of unintended consequences that we are seeing now in the construction industry will be avoided.
