Labor Substitution and Foregone Earnings
RCTReview
Evaluations of public works programs often assume that participant wage payments represent net economic gains. However, because public works require heavy physical time commitments, participants and family members frequently reduce existing productive labor, offsetting gross program wage transfers.
Picture this
Imagine a street vendor who earns $10 a day selling fruit. When a temporary government construction job opens paying $15 a day, the vendor accepts it but must close the fruit stand. The vendor does not gain $15 in brand-new income; net earnings only increase by $5 because $10 of fruit sales were given up to do the government work.
What the evidence says
In Côte d'Ivoire, net participant earning gains accounted for only 53 percent of total public works wages due to foregone lower-paying work. In the Democratic Republic of the Congo, when one family member participated, other household members worked 1.5 percentage points less, contributing to a 9 percent decline in total monthly household earnings.
- Who was studied
- Randomized controlled trials involving thousands of program participants in Côte d'Ivoire and the Democratic Republic of the Congo.
- How
- Individual and intra-household randomized controlled trials measuring daily time allocation, self-employment days, and total monthly household earnings.
What to do
Calculate net economic program benefits by subtracting estimated foregone private earnings and household labor reductions from total public wage disbursements.
From the source
"The increased income experienced by participants usually represented only a fraction of the PWP's overall transfer amount. This suggests that PWP participants often reduced their time spent on other income-generating activities while participating in PWPs."
Public works programs and labor market outcomes.pdf