Supply variabilities in public workfares

Abstract

This paper presents a model of the labor market where public workfares increase private wages by reducing labor supply. In a dynamic setting, we show that when wages are downwardly rigid, forward-looking employers optimally compress wage increases in response to intertemporal variability in the level of program implementation. The model generates two key predictions: greater variability in program provision results in a larger compression of wage increases, and compression of wage increases is more severe under low inflation. We empirically verify these predictions using data from two large workfares from India.