Using India’s Public Distribution System (PDS) as a case study, new research shows social transfers may reduce labour supply, but increase wages
A common belief about social transfers is that they make their recipients lazy, decrease labour supply and do not reduce poverty. According to research that examines India’s largest social transfer programme, the public distribution system (PDS), social transfers indeed reduce labour supply but this increases wages and alleviates poverty.
In the study, Aditya Shrinivas and others inspect the variations in PDS transfers that occurred after the implementation of the National Food Security Act (NFSA) in 2013. The NFSA imposed national price targets that decreased the price of rice and wheat to Rs.3 and Rs.2 per kg, respectively. The Act also altered the way PDS transfers were allocated. Before NFSA, many states allocated transfers at the household level but after NFSA, these transfers were allocated on a per-capita basis. This led to more generous transfers to larger households.
Using data from 1,300 households in 30 villages across eight states from 2010 to 2015, the authors examine how these changes in PDS transfers affected labour supply and wages. They find that a Rs.100 increase in transfer per household per month led to 3.3% decrease in labour supply. This reduction in labour supply increased daily wages by 8.6%.
Please click here to read more.