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Public Works as a Safety Net
Where the market wage is higher than the minimum wage, publicly funded program wages aimed at self-selection of the poor can be set at or slightly higher than the minimum wage, but lower than the prevailing market wage. In the public works program introduced by the Republic of Korea following the 1998 financial crisis, the program wage was set at a level slightly below the prevailing market wage for unskilled labor to ensure that only those most in need would participate. During the crisis, the average market wage rate fell both before and during the operation of the public works program, and the public works wage was adjusted downward to ensure it was lower than the (declining) average market wage, thus enabling self-targeting to the poorest (Hur 2001; Subbarao 1999). In some countries and for a variety of reasons (including weak enforcement of minimum wage legislation), the market wage is below the minimum wage, and/or restrictive employment laws prevent setting a public works program wage below the minimum wage. In such cases, the scope for self-selection is ruled out because the program wage, now higher than the ruling market wage, is most likely to attract the nonpoor to the program. Colombia’s Empleo en Acción (Employment in Action) is unable to self-select its beneficiaries due to a legal obligation to pay the minimum wage (and possibly benefits).1 One way to overcome this barrier is to enforce strict targeting rules for participation. The program thus limits eligibility to workers classified as categories 1 or 2 (the lowest income quintiles) in its System for Selecting Beneficiaries of Social Programs, which is a proxy means testing system that classifies people based on an assessment of the living conditions of individual families.2 Table 4.5 shows that there is much variation across countries in the relationship between program wage, market wage, and the minimum wage, although the limited information available makes delineation of any pattern quite difficult. In general, most of the countries in the sample did succeed in keeping the program wage relatively low, with some countries faring better than others in this regard. Within a country, it is also possible to have large variations in wages (as the Rwanda case study in chapter 8 highlights). Table 4.6 shows the variation in minimum wages of unskilled casual (daily) labor across Indian states in 1999; on average, 75 percent of these workers worked for less than the minimum wage. This evidence suggests that an employment guarantee scheme in which the wage is set at the level of the minimum wage (which, in many countries, is higher than the market wage) would be extremely expensive for the government and likely to result in poor targeting by attracting the nonpoor to the program (discussed by O’Keefe 2005).