Productivity Gains from Changes in the Employment Structure Away From Agriculture to Non-agricultural Sectors: A Critical Analysis in the Indian Context

Abstract

It is widely believed that, in the process of economic development, the structure of employment in an economy changes from agriculture to non-agricultural sectors, and this structural transformation enhances the overall level of labour productivity and total factor productivity of the economy. This is so because the non-agricultural sectors, such as manufacturing and services, are significantly more productive than agriculture, which is treated as a stylized fact. The validity of this view or belief is critically appraised in the present article in the context of the Indian economy. We find from our analysis that labour productivity in the informal segments of manufacturing and services is lower than in agriculture. Therefore, shifts of workers from agriculture to manufacturing and services need not raise overall productivity because a significant part of this shift is likely to occur in the informal segments of non-agricultural sectors. A deeper analysis of the data reveals substantial inter-enterprise variations in labour productivity within agriculture and within the informal segments of non-agricultural sectors. Hence, workers at the low end of the productivity distribution of agricultural enterprises can gainfully shift to a slightly higher level of productivity in informal manufacturing and services enterprises. Analysing data on agricultural households in India, we find that households experiencing relatively low productivity are more likely to diversify into non-farm activities. In many cases, this would raise their income, uplifting their living standards.