Can Wage-Setting and Job Guarantee Programmes Substitute for Formal Employment Creation? An Analysis of Employment, Human Capital, and Real Wages in India.....

Public employment programmes have become an important component of India's social and economic policy, particularly in rural areas where seasonal unemployment, underemployment, and income instability remain widespread. These programmes aim to provide temporary employment, stabilize rural incomes, reduce distress migration, and create community assets. By guaranteeing a minimum number of days of work at government-determined wages, they establish a wage floor for low-income households while functioning as an instrument of social protection. However, an important economic question arises regarding whether a wage-setting and job guarantee programme, such as VB-G-RAM-G, can become a substitute for formal job creation, market-driven employment opportunities, and sustainable wage determination. This question becomes even more significant when public expenditure on education and healthcare remains relatively limited compared with the investment required to build a highly productive workforce, while considerable fiscal resources are devoted to employment programmes, subsidies, and welfare transfers. If the economy does not simultaneously generate productive employment through industrial expansion, modern services, technological innovation, and human capital development, public employment programmes may gradually evolve from temporary safety nets into permanent income support systems. The answer depends on understanding the relationship between labour productivity, education, investment, wage growth, and economic development. Employment guarantees can reduce poverty and provide income security, but they cannot independently generate the productivity improvements necessary for sustained increases in real wages and living standards.

 

Discussion 

In every modern economy, sustainable wage growth originates primarily from rising labour productivity rather than administrative wage determination. Firms pay higher wages when workers produce greater economic value, allowing businesses to remain profitable while compensating employees more generously. Productivity itself depends upon education, healthcare, technical skills, infrastructure, technology adoption, investment, and innovation. A public employment guarantee programme provides employment by government decision rather than by market demand for labour. Consequently, although it offers temporary income support, it does not necessarily increase the productive capacity of workers or create long-term employment opportunities in sectors capable of generating continuous income growth. If governments increasingly rely upon employment guarantees instead of expanding manufacturing, modern agriculture, logistics, construction, tourism, digital services, and advanced industries, the programme risks becoming a substitute for economic transformation rather than a bridge toward it. In India, a substantial proportion of the labour force remains employed in agriculture despite agriculture contributing a much smaller share of national output than its share of employment. This reflects relatively low labour productivity. Rural workers often experience irregular employment, seasonal incomes, and limited access to high-productivity occupations. Employment guarantee programmes partially compensate for these structural weaknesses by providing supplementary work during periods of low agricultural activity. Nevertheless, supplementary employment cannot replace productive employment generated by expanding private and public investment.

 

Human Capital and Employment 

One of the most important determinants of formal employment is human capital. Education improves cognitive ability, technical knowledge, adaptability, and problem-solving capacity. Healthcare improves physical productivity, reduces absenteeism, and increases labour-force participation. When government expenditure on education and health remains insufficient relative to the economy's needs, several long-term consequences emerge. Workers enter labour markets with inadequate foundational skills. Vocational training remains limited. Industrial employers struggle to recruit appropriately skilled workers. Productivity growth slows. Formal employment creation becomes constrained. Real wages remain stagnant because labour productivity fails to improve sufficiently. Under such circumstances, governments may increasingly expand employment programmes to compensate for inadequate private-sector job creation. While this approach may temporarily reduce unemployment and rural distress, it does not eliminate the structural causes of low productivity. Without substantial improvements in education and healthcare, workers remain concentrated in low-productivity occupations, limiting their long-term earning potential.

 

Wage Determination 

In competitive labour markets, wages are generally determined through interaction between labour demand and labour supply. Employers demand workers according to expected productivity. Workers supply labour according to available employment opportunities and expected earnings. Government job guarantee programmes introduce an administrative wage floor that influences rural labour markets. Employers may need to increase wages modestly to compete for workers when guaranteed employment is available. This effect can improve bargaining power among the poorest workers. However, administrative wage determination differs fundamentally from productivity-based wage growth. If government wages rise significantly without corresponding productivity improvements, employers may reduce hiring or substitute labour with mechanization. Conversely, if government programme wages remain below inflation, real wages decline despite nominal wage increases. Therefore, sustainable wage determination ultimately depends upon productivity growth rather than government announcements alone.

 

Economic Theories 

Classical economic theory argues that wages reflect labour productivity over the long run. Higher productivity enables firms to pay higher wages without reducing profitability. Human capital theory emphasizes education, healthcare, and skill development as investments that permanently increase worker productivity and earnings. Keynesian economics supports government employment programmes during periods of insufficient private demand. Public employment can stabilize household incomes, sustain consumption, and reduce unemployment during economic downturns. However, Keynesian policy generally views such programmes as countercyclical measures rather than permanent substitutes for private employment. Structural transformation theory explains that economic development occurs when labour shifts from low-productivity agriculture toward higher-productivity manufacturing and services. Countries achieving sustained income growth have historically expanded industrial employment alongside rising educational attainment. Institutional economics recognizes that labour-market institutions, including minimum wages and employment guarantees, influence bargaining power and income distribution. Nevertheless, institutions function most effectively when supported by productive economic growth. These theoretical perspectives collectively suggest that employment guarantees complement development but cannot replace structural transformation.

 

Analysis 

India continues to experience relatively low labour-force productivity across significant sections of the rural economy. Agriculture employs a much larger proportion of workers than its contribution to national income, indicating disguised unemployment and underemployment. Real wage growth has also remained uneven. Although nominal wages have increased over time, inflation has frequently reduced purchasing power, limiting improvements in household living standards. Consequently, many rural households continue to depend upon multiple sources of income, including government welfare programmes, subsidized food distribution, cash transfers, and employment guarantees. Large-scale public employment programmes undoubtedly reduce extreme poverty, improve rural liquidity, and provide consumption stability during adverse economic conditions. However, these programmes cannot create the technological innovation, industrial expansion, export competitiveness, entrepreneurial activity, and capital formation necessary for sustained employment growth.

 

Government expenditure directed primarily toward employment guarantees without proportionate investment in education, healthcare, research, vocational training, and infrastructure may reduce immediate hardship but risks slowing long-term productivity growth. Formal employment requires businesses willing to invest, expand production, adopt technology, and compete internationally. Businesses invest where skilled workers, reliable infrastructure, predictable regulation, efficient logistics, and healthy labour markets exist. If educational outcomes remain weak and skill shortages persist, investment may increasingly favour automation or capital-intensive production rather than labour-intensive employment. Similarly, widespread dependence upon welfare transfers and subsidized consumption can alleviate poverty but cannot permanently increase national productivity. The most successful economies historically combined social protection with extensive investments in education, healthcare, industrial policy, infrastructure, innovation, and export-oriented manufacturing. Employment programmes functioned as transitional support rather than permanent employment systems.

 

Data from India's labour market indicate that informal employment continues to account for the overwhelming majority of total employment, while formal employment remains comparatively limited. Youth unemployment is significantly higher among educated individuals, reflecting a mismatch between educational outcomes and labour-market requirements. Female labour-force participation, although improving in recent years, remains below the levels observed in many rapidly industrializing economies. Public expenditure on education and health as a share of gross domestic product has generally remained lower than the levels seen in several countries that successfully expanded high-productivity employment. At the same time, government spending on rural welfare, food subsidies, and employment support has increased substantially over the years. This combination has strengthened social protection but has not fully resolved the structural challenges of productivity, skills, and formal job creation.

 

A wage-setting and job guarantee programme such as VB-G-RAM-G can play a valuable role in reducing rural poverty, stabilizing household incomes, providing temporary employment, and establishing a minimum wage benchmark. It serves as an important social safety net, particularly during periods of economic distress, agricultural uncertainty, or weak labour demand. However, such programmes cannot substitute for formal employment creation, market-based job opportunities, or productivity-driven wage determination. Sustainable improvements in real wages require continuous increases in labour productivity supported by quality education, accessible healthcare, vocational training, technological advancement, industrial expansion, infrastructure development, and private investment. Without these foundations, employment guarantees risk becoming permanent income-support mechanisms rather than pathways to economic transformation. Long-term prosperity depends not on replacing productive employment with public employment but on enabling workers to transition into higher-productivity occupations that generate rising incomes through economic growth. Employment guarantees should therefore complement, rather than replace, comprehensive strategies focused on human capital development, industrialization, entrepreneurship, and formal job creation. Only this balanced approach can deliver sustained real wage growth, stronger labour markets, and durable improvements in living standards across rural and urban India.