High unemployment potentially leading to inflation, particularly in the long run.....

 NREGS primarily creates employment in the public sector, particularly in rural areas, by providing unskilled manual labor on infrastructure projects. While NREGS doesn't directly create jobs in private, business, or service sectors, it can have indirect impacts on these sectors. For example, increased wage payments to rural households through NREGS can boost demand for goods and services in local markets.

Employment under NREGS:

Rural Employment:

NREGS guarantees 100 days of employment per year to rural households willing to do unskilled manual labor.

Public Works:

This employment is primarily in the form of public works projects like road construction, irrigation, and rural sanitation.

Numbers:

Since its inception in 2006, NREGS has generated around 12 billion person-days of employment and paid ₹1,10,000 crore (about $25 billion) directly to rural households. On average, 5 crore (50 million) households have been provided employment annually since 2008.

Public Sector Focus:

The scheme's primary goal is to create employment opportunities within the public sector, offering wage employment for manual labor tasks.

Indirect Impact on Private, Business, and Service Sectors:

Increased Demand:

The wage payments made to NREGS workers increase their purchasing power, potentially boosting demand for goods and services in local markets, which can benefit private businesses and service providers in rural areas.

Infrastructure Development:

NREGS-funded infrastructure projects, such as road construction and irrigation, can also indirectly benefit businesses by improving connectivity and facilitating the movement of goods and services.

Skilled Labor Market:

NREGS can also open up opportunities for skilled manpower at the block and village level, potentially leading to new business avenues in areas like postal services, financial services, and ICT.

Urban Areas:

No Direct Coverage:

NREGS is primarily designed for rural areas and does not directly cover urban employment.

Potential Indirect Impacts:

While not a direct focus, NREGS can have indirect impacts on urban areas through increased demand for goods and services from rural households, and the movement of skilled laborers to urban areas after gaining experience from the scheme.

Higher unemployment can paradoxically lead to lower supply and increased inflation. When unemployment is high, firms may reduce their output and prices, but the overall demand for goods and services can also decrease, leading to a scenario where unemployment is high, and inflation is low, but the long-term economic consequences can be severe.

Explanation:

Lower Supply:

When many people are unemployed, their purchasing power decreases, leading to lower overall demand in the economy. This reduced demand can cause firms to cut back on production, leading to a decrease in supply. For example, if the unemployment rate in Gorakhpur, Uttar Pradesh rises from 5% to 10%, many households may spend less, and local businesses like textile shops or restaurants might reduce production to match the lower demand.

Increased Inflation:

While it might seem counterintuitive, this scenario can also lead to increased inflation in the long run. The decrease in supply can lead to a scarcity of goods and services, even with decreased demand. This can create upward pressure on prices, as the limited supply is competing with the remaining demand. For example, if a textile shop reduces its inventory due to low demand, the remaining goods may be sold at a higher price, even if overall demand is lower, leading to inflation.

The Phillips Curve:

The relationship between inflation and unemployment is often described by the Phillips curve. In the short run, there can be a trade-off between the two, where low unemployment leads to higher inflation, and high unemployment leads to lower inflation. However, in the long run, the Phillips curve is believed to be vertical, meaning that the natural rate of unemployment (the level of unemployment that exists in the absence of cyclical unemployment) is unaffected by changes in inflation.

Example:

Let's say in Gorakhpur, Uttar Pradesh, there's a sudden increase in unemployment due to a factory closure, resulting in 1,000 workers losing their jobs. This could lead to a decrease in overall demand for goods and services in the city, such as clothing, food, and transportation. If the remaining 1,000 workers still spend the same amount, but the overall supply of goods and services decreases, this could lead to higher prices for those goods and services. For example, the price of rice might increase from ₹50 per kg to ₹60 per kg, despite a decrease in overall demand, as the supply of rice has also decreased.

In essence, NREGS primarily generates public sector employment in rural areas through unskilled manual labor on infrastructure projects. While the scheme's direct impact on private, business, and service sectors in urban areas is limited, it can have indirect effects through increased rural demand and the movement of skilled labor. Based on available data, it appears only one country with a $4 trillion+ economy, India, has an employment guarantee program. India's economy has surpassed $4 trillion, making it the 4th largest in the world. It has a program called the "Mahatma Gandhi National Rural Employment Guarantee Act" (MGNREGA), which guarantees employment for rural families. The United States, China, and Germany are among the largest economies in the world, with the US having a GDP of $30.5 trillion, and China at $19.231 trillion. However, they don't have a similar guaranteed employment program like India's MGNREGA. While high unemployment can initially lead to lower prices due to reduced demand, the subsequent decrease in supply due to reduced production can create upward pressure on prices, potentially leading to inflation, particularly in the long run.