Association for Public Policy Analysis & Management

Many developing countries use in-kind food subsidies, which offer a rationed quantity of staple food to the needy at a highly subsidized price, to improve food security and reduce poverty. A potentially important but less studied question is whether in-kind food subsidies affect labor supply and wages. Policy-makers and the public are often concerned that social assistance programs discourage work and enable the “lazy poor”. Economists, on the other hand, have pointed out that a reduction in the labor supply of poor households in the private sector could drive up low-skilled wages and thus have an additional poverty-reducing effect in general equilibrium. Recent studies suggest that the poverty-reducing effects of social assistance programs can be substantially underestimated if these kinds of general equilibrium effects are not taken into account.

In this paper, we estimate the labor market effects of the world’s largest in-kind food subsidy- India’s Public Distribution System (PDS) - using ICRISAT’s panel data from 30 villages in India between 2010-2015. Our empirical strategy exploits state-level expansions of PDS subsidies that followed the National Food Security Act of 2013. This data allows us to estimate the effect of the PDS subsidy on labor supply at the household level separately for men and women and the equilibrium wage at the village-level in a regression that controls for household and time fixed effects.

We show that increases in the generosity of the PDS subsidy reduce household labor supply and raise the equilibrium wage. When we disaggregate the effects, based on gender and type of labor market, we find the wage effects are highest for the segments with the largest labor supply effects. In all, we find the highest incidence of PDS subsidy on the casual unskilled labor, which in principle is the desired population that PDS is targeted towards. Our estimates provide novel evidence for a labor market effect of in-kind food subsidies, based on plausibly exogenous policy variation in a panel framework with household and village fixed effects.

We further explore whether in-kind food subsidies can provide a buffer against the labor market effects of negative economic shocks. By reducing the dependence of poor households on labor income, PDS subsidies might therefore have particularly beneficial labor market effects in years with bad economic shocks. Consistent with this intuition, we find that the effect of PDS subsidies on labor supply and wages is particularly large during years with late monsoon onset, a rainfall shock associated with reduced agricultural production. This result suggests that in-kind food subsidies can play an important role in preventing the vicious cycle of low wages and high labor supply that afflicts poor households in bad years.

In-kind food subsidies can thus improve the welfare of the poor through a labor market effect in addition to their direct effect on food consumption and nutrition. Our results highlight the importance of accounting for local general equilibrium effects; ignoring these effects would lead us to underestimate the impact of in-kind food subsidies on the welfare of the poor.