Payment delay in workfare programmes and household welfare: Theory and some evidence from India

Abstract

Using the lens of a life cycle model, we argue that an administrative failure of a wage payment delay in a workfare programme could adversely affect the welfare of the poor through two channels. First, it imposes an implicit consumption tax on the household. Second, it changes the status of labour from a “cash” to a credit” good and encourages workers with negative net worth to work harder to clear off the debt. The loss of welfare persists even when the worker has outside employment options. The model's prediction accords well with India's flagship National Rural Employment Guarantee Act (MGNREGA), where payment delay to workers participating in the programme has been endemic. Our empirical evidence suggests that, contrary to conventional wisdom, worker participation in the MGNREGA programme is positively associated with a wage payment delay. However, such increased worker participation instead of signalling success of the programme points to a deeper problem of this workfare programme because of the welfare loss suffered by asset-poor households.