General Equilibrium Wage Spillovers
RCTReview
Public works programs are often designed to support individual participants, but policymakers overlook how large-scale government employment alters broader wage structures in the local private sector. Without accounting for market-level general equilibrium effects, the full economic impact of workfare interventions on non-participants remains underestimated.
Picture this
Imagine a small town where a single large factory hires almost everyone at low wages because workers have no alternative options. If the government opens a massive construction project next door offering higher pay, the factory owner is forced to raise wages to prevent workers from quitting. Even townspeople who do not work on the government project end up getting paid more because the factory had to raise its base pay for everyone.
What the evidence says
In India's NREGA, 80 percent of the total earnings increase for participants resulted from higher private sector wages rather than direct program transfers. In Ethiopia, public works rollouts increased private sector wages by 9 to 18 percent by reducing private sector labor supply.
- Who was studied
- Millions of rural and urban households across multi-year national program rollouts in India (NREGA) and Ethiopia (Urban Productive Safety Net Program).
- How
- Randomized evaluation and spatial equilibrium modeling measuring public and private sector wage dynamics.
What to do
Set public works wage rates slightly above prevailing market floor rates in large-scale deployments to incentivize private sector wage increases across local economies.
From the source
"Though the NREGA program in India increased earnings for participants, 80 percent of this increase came from boosted private sector earnings. NREGA's wage rate likely affected this private sector earning increase, as NREGA paid participants above prevailing market wages."
Public works programs and labor market outcomes.pdf