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A Theory of Employment Guarantees: Contestability, Credibility and Distributional Concerns

  • Basu, Arnab K
  • Chau, Nancy H
  • Kanbur, Ravi

This paper develops a theory of employment guarantees when labor markets are imperfect and when the credibility of government policy announcements could be in doubt. The basic feature of an EGS is that any individual who satisfies a set of specified criteria is guaranteed public employment at a given wage if they want it. Thus, the two factors that define the guarantee are the wage and the ease of access. The problem for the planner is to choose these to maximize a social welfare function. If the labour market is perfectly competitive, then the introduction of an employment guarantee scheme is bound to have efficiency costs, and can only be justified through its positive distributional consequences – this has been the framework for most of the theoretical and empirical analysis of employment guarantee schemes. If the labor market is imperfect, however, the announcement of a credible employment guarantee scheme can improve efficiency through the introduction of contestability in the private labour market. The paper then considers the issue of credibility and solves for an incentive compatible employment guarantee scheme in a rational expectations equilibrium. It is shown that the outcome with a planner who cares only about efficiency can be less efficient than the outcome with a planner whose social welfare function also gives weight to poverty!

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5784.

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Date of creation: Aug 2006
Date of revision:
Handle: RePEc:cpr:ceprdp:5784
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  1. Basu, Arnab K. & Chau, Nancy H. & Kanbur, Ravi, 2009. "A theory of employment guarantees: Contestability, credibility and distributional concerns," Journal of Public Economics, Elsevier, vol. 93(3-4), pages 482-497, April.
  2. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  3. Ravallion, Martin, 1991. "Reaching the Rural Poor through Public Employment: Arguments, Evidence, and Lessons from South Asia," World Bank Research Observer, World Bank Group, vol. 6(2), pages 153-75, July.
  4. Bardhan, Pranab & Rudra, Ashok, 1981. "Terms and Conditions of Labour Contracts in Agriculture: Results of a Survey in West Bengal, 1979," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 43(1), pages 89-111, February.
  5. K. Subbarao, 1997. "Public Works as an Anti-Poverty Program: An Overview of Cross-Country Experience," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(2), pages 678-683.
  6. Basu, Arnab K. & Chau, Nancy H. & Kanbur, Ravi, 2005. "Turning a Blind Eye: Costly Enforcement, Credible Commitment and Minimum Wage Laws," Working Papers 127081, Cornell University, Department of Applied Economics and Management.
  7. Dreze, Jean & Sen, Amartya, 1991. "Hunger and Public Action," OUP Catalogue, Oxford University Press, number 9780198283652, July.
  8. Dar, Amit & Tzannatos, Zafiris, 1999. "Active labor market programs: a review of the evidence from evaluations," Social Protection Discussion Papers 20116, The World Bank.
  9. Baumol, William J & Lee, Kyu Sik, 1991. "Contestable Markets, Trade, and Development," World Bank Research Observer, World Bank Group, vol. 6(1), pages 1-17, January.
  10. Besley, Timothy & Coate, Stephen, 1992. "Workfare versus Welfare Incentive Arguments for Work Requirements in Poverty-Alleviation Programs," American Economic Review, American Economic Association, vol. 82(1), pages 249-61, March.
  11. Besley, T., 1988. "Workfare Vs. Welfare: Incentive Arguments For Work Requirements In Poverty Alleviation Programs," Papers 142, Princeton, Woodrow Wilson School - Public and International Affairs.
  12. Assaad, Ragui, 1997. "The Effects of Public Sector Hiring and Compensation Policies on the Egyptian Labor Market," World Bank Economic Review, World Bank Group, vol. 11(1), pages 85-118, January.
  13. Teklu, Tesfaye & Asefa, Sisay, 1999. "Who Participates in Labor-Intensive Public Works in Sub-Saharan Africa? Evidence from Rural Botswana and Kenya," World Development, Elsevier, vol. 27(2), pages 431-438, February.
  14. Raghav Gaiha & Katsushi Imai, 2002. "Rural Public Works and Poverty Alleviation--the case of the employment guarantee scheme in Maharashtra," International Review of Applied Economics, Taylor & Francis Journals, vol. 16(2), pages 131-151.
  15. Boadway, Robin & Cuff, Katherine & Marceau, Nicolas, 2003. "Redistribution and employment policies with endogenous unemployment," Journal of Public Economics, Elsevier, vol. 87(11), pages 2407-2430, October.
  16. Basu, Arnab K., 2011. "Impact of Rural Employment Guarantee Schemes on Seasonal Labor Markets: Optimum Compensation and Workers' Welfare," IZA Discussion Papers 5701, Institute for the Study of Labor (IZA).
  17. Blaug, Mark, 1963. "The Myth of the Old Poor Law and the Making of the New," The Journal of Economic History, Cambridge University Press, vol. 23(02), pages 151-184, June.
  18. Baumol, William J, 1982. "Contestable Markets: An Uprising in the Theory of Industry Structure," American Economic Review, American Economic Association, vol. 72(1), pages 1-15, March.
  19. Foster, James & Greer, Joel & Thorbecke, Erik, 1984. "A Class of Decomposable Poverty Measures," Econometrica, Econometric Society, vol. 52(3), pages 761-66, May.
  20. Ravallion, Martin & Datt, Gaurav & Chaudhuri, Shubham, 1993. "Does Maharashtra's Employment Guarantee Scheme Guarantee Employment? Effects of the 1988 Wage Increase," Economic Development and Cultural Change, University of Chicago Press, vol. 41(2), pages 251-75, January.
  21. Bardhan, Pranab K, 1979. "Labor Supply Functions in a Poor Agrarian Economy," American Economic Review, American Economic Association, vol. 69(1), pages 73-83, March.
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