Rural Employment Guarantee and Rural Minimum Wage

We explore the theoretical implications of the largest employment guarantee in the world, implemented by India through the Mahatma Gandhi National Rural Employment Guarantee Act, in terms of a modified (Harris and Todaro in Am Econ Rev 60(1):126–142, 1970) model. Based on the pioneering contribution of Jones (J Polit Econ 73:557–572, 1965), Jones (Trade, balance of payments and growth: essays in honor of CP Kindleberger. Amsterdam, North-Holland, 1971) we develop a framework. A variant of the specific factor model of Jones (Trade, balance of payments and growth: essays in honor of CP Kindleberger. Amsterdam, North-Holland, 1971) is used to show that the scheme which prescribes a minimum rural wage along with employment guarantee can have ambiguous effects on propensity to migrate from rural areas and may increase aggregate unemployment. We further explore the effects of these distortions by constructing an elaborate general equilibrium model that incorporates an informal sector.