General Equilibrium Wage Spillovers

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In Simple Words

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.

Private-sector workers in Ethiopia’s evaluation

Study comparison areas
Comparison areas
Public works rollout areas
Higher private-sector wages

Ethiopia’s urban public works evaluation. Reported wage gains varied with rollout scale; this does not mean every worker joined public works.

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Research question

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.

Participants

Millions of rural and urban households across multi-year national program rollouts in India (NREGA) and Ethiopia (Urban Productive Safety Net Program).

Study Design

Randomized evaluation and spatial equilibrium modeling measuring public and private sector wage dynamics.

Results

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.

Takeaway

Set public works wage rates slightly above prevailing market floor rates in large-scale deployments to incentivize private sector wage increases across local economies.

Source and citation

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