Labor Market E ects of Social Programs : Evidence from India ' s Employment Guarantee ∗

A growing body of evidence shows that social programs, beyond their direct e ect on bene ciaries, can also a ect non bene ciaries, via changes in market equilibrium. We still know very little, however, about the e ects of social programs on labor markets. In particular, public employment schemes, which are a popular form of poverty relief in developing countries, may crowd out private sector work and increase wages, thus redistributing income to households which are net suppliers of labor. This paper brings the rst empirical evidence that these e ects not only exist, but are of rst order importance. Using the gradual roll out of a large rural workfare program in India, we estimate its e ect on private employment and wages by comparing districts that received the program earlier relative to those that received it later. Our results suggest that public sector hiring crowds out private sector work and increases private sector wages. We use these estimates to compute the implied welfare gains of the program by consumption quintile. Our calculations show that the welfare gains to the poor from the equilibrium increase in private sector wages are large in absolute terms and large relative to the gains received solely by program participants. JEL: H53 J22 J23 J38