Government Employment Guarantee, Labor Supply and Firms’ Reaction: Evidence from the Largest Public Workfare Program in the World

Using establishment-level employment and operating data, we examine the impact of the Indian government’s employment guarantee program on labor and firm behavior. We exploit the staggered implementation of the program for identification and find that the program led to a 10% reduction in permanent workforce in firms. Firms responded to the adverse labor supply shock by resorting to increased mechanization. This significantly increases the firms’ cost of production, thereby leading to a decline in net profits and productivity. These effects manifest primarily in firms paying low wages, having low labor productivity and greater sales volatility, and firms located in states with pro-employer labor regulations.