18 September 2006

How the National Rural Employment Guarantee Scheme Will Benefit You

There's been a lot of talk about how the National Rural Employment Guarantee Scheme (NREGS) will go a long way in benefiting the poor and downtrodden. No doubt, if implemented properly, it will promote equality and lead to fuller economic development.

But get this. The NREGS will benefit not only rural areas, but also all of you, sitting in front of your computer screens in urban centres across India. How? It will benefit you because it will lessen rural-urban migration. The biggest problem plaguing cities in India is that they are getting too crowded. Crowded with migrants from rural areas all over the country. As a result, there's tremendous stress on infrastructure. Power and water shortages become commonplace. Pollution increases. Public amenities like sanitation and health facilities deteriorate. Wouldn't it be nice if people stopped flooding into cities?

Now what does all this have to do with the NREGS? How will the NREGS lessen migration from rural to urban areas? Well, the answer lies in Todaro's Model of Rural-Urban Migration, or the Todaro Model for short. The Todaro Model attempts to explain when and for what reasons people migrate from rural to urban areas. The basic reasoning is as follows.

Why does a person leave a village and go to a city? The most basic reason is that the person is looking for better employment opportunities: a job that gets him more money. If the wage a worker gets as an agricultural labourer is less than what he would get as a construction worker in the city, it makes more sense for him to go and settle in the city. So, as long as the rural wage rate is below the urban wage rate, migration should occur.

But it's not that simple. When a villager has to leave the village, he is effectively making a choice between a rural income stream and an urban income stream. The point to be noted is that the rural income stream is a certainty, whereas the urban income stream is uncertain. The person does not know whether he will find a job once he reaches the city. Therefore, the benefit from moving to the city has to be deflated by a certain degree to allow for the possibility that the person may not get a job on arrival in the city. Then these two benefits must be compared - the benefit from staying, ie. the rural income stream, with the benefit from migrating, ie. the urban income stream deflated for the possibility of unemployment. This deflated urban income stream is called the 'expected' urban income stream.

Lets now see how this deflation is done. Say the rural wage rate is Rs. 40 and the urban wage rate is Rs. 50. However, the unemployment rate in the city is 10%. So, there is a 90% probability that the person will get a job. In other words, 90% chances are that he will get an income of Rs. 50 and 10 % chances are that he will get an income of Rs. 0. The expected income is the weighted average of these two possibilities. In our case, it would be 90% x 50 + 10% x 0 = 45 + 0 = Rs. 45. This is the same thing as saying that the expected income can be got by multiplying the employment rate with the urban income. In this example, it would benefit the person to migrate because the expected urban income is greater than the rural income. In fact, it would make sense to migrate until the unemployment rate is 20%.

Speaking generally, if the urban wage is W(U), the rural wage rate is W(R), the number of urban jobs is J(A) and the number of job seekers is J(S), then the employment rate is J(A)/J(S) and the expected urban income is W(U) x J(A)/J(S). Migration will take place if W(U) x J(A)/J(S) is greater than W(R).

However, as migration takes place, the number of job seekers increases while the number of jobs remains the same. Thus, the employment rate decreases and the expected urban income decreases. So the gap between rural income and expected urban income reduces. Migration continues until this gap is eliminated. This is the process that determines the extent of migration from rural to urban areas.

Now, how will the NREGS help? The NREGS will provide an increased rural income to its target group. So, the average rural income will rise. The gap between rural and urban income will be reduced without migration. Therefore, a lesser magnitude of migration will be necessary to further eliminate the gap between rural and expected urban incomes. If the gap between rural and urban incomes is high then the employment rate must be low for equality between rural and expected urban incomes. If the number of jobs remains the same, then this means that the number of job seekers must rise drastically, calling for greater migration. If, on the other hand, the gap is small, then the employment rate must be high to maintain that equality. With the same number of jobs, it calls for fewer job seekers than in the earlier situation, and consequently lesser migration.

So, by raising rural income levels, the NREGS will raise the standards of living of rural India so that rural Indians are less compelled to migrate to urban areas. The ideal state would be one where the rural living standard is as high as the urban living standard, and people are as happy living in a village as in a city. This is the case in a few developed countries of the world. The NREGS is the first step in the process of India attaining this state.

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