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

Using establishment-level employment and operating data, we examine the impact of Indian government’s employment guarantee program on labor and firm behavior. Using the staggered implementation of the program for identification, we find that the program leads to 10% reduction in permanent workforce in factories. Factories respond to the adverse labor supply shock by resorting to increased mechanization. As a result, firms’ cost of production increases significantly leading to a reduction in net profits and productivity. These effects manifest primarily in firms paying low wages, having low labor productivity, greater cash-flow volatility and firms located in states with pro-employer labor regulations.