Moving Up or Just Surviving? Nonfarm Self-Employment in India

The classical economic development literature argues that growth is accompanied by a reduction in agriculture’s share and an increase in nonagriculture’s share of employment. Yet growth of the nonfarm sector does not necessarily signal increasing levels of development, as the sector may serve as subsistence employment for many individuals. This ambiguity is heightened by a surprising lack of microevidence regarding sectoral and occupational choice and, especially, how government policies impact these decisions. In this article, I make a simple observation regarding how nonfarm self-employment reacts to market conditions: households and individuals that enter into nonfarm self-employment for subsistence reasons are more likely to exit the sector when wages increase or when more stable employment becomes available. With this assumption as a starting point, I examine the effects of the Mahatma Gandhi National Rural Employment Guarantee Act, which increased prevailing wages in rural India. The program significantly decreases days spent in nonfarm self-employment. In addition, the implied labor elasticity is three times higher than economy-wide estimates, suggesting rural nonfarm self-employment is a sector of last resort for many individuals. Additional analyses suggest this impact is driven primarily by two mechanisms: higher wages and alternative options for risk-management.