Economic Development and Labour Transition in India

Elaboration, 2017

38 Pages, Grade: 9

Free online reading


Introduction: Lewis Dual Sector Model

Lewis Dual Sector Model: Perspective of Different Countries.

Lewis Dual Sector Model: Indian Perspective.

Pull and Push Factors Responsible for Shift of Labour from Agriculture to other Sectors

Evidence of Lewis Dual Sector Model in different States of India

Estimating Rate of Structural Transformation in India

Determinants of Structural Transformation: An Econometric Estimation

Drawbacks of the Lewis Dual Sector Model



List of Tables

Labour productivity of different countries in terms of value added per worker.

Sectoral employment elasticity as per twelfth five year plan

Percentage share of employment and income in agriculture and non-agriculture sector

Movement of Indian economy: Trends in GDP across sectors

Percentage share of employment by status to total employment

Trend in rural employment from 1987-88 to 2009-10

Disparities in agriculture and non-agriculture income

Number and average Size of land holding across land size classes

State wise Employment generation in Agriculture, Manufacturing, Non-manufacturing, Service sector and Production and Labour Productivity comparison as on 2004-05

State wise employment generation in agriculture, manufacturing, non-manufacturing, service sector and production and labour productivity comparison as on 2009-10

State wise net absolute change in employment generation in agriculture, manufacturing, non-manufacturing , service sector & production and labour productivity comparison between the perio of 2004-05 and 2009-10

States which showing more than 10% decrease in the agriculture labour migration

States which showing 5-10% decrease in the agriculture labour migration

States which showing 1-5% decrease in the agriculture labour migration

Sate specific poverty lines

Estimation Of Labour Force Reduction in Agriculture by 2019-20

Rate of Structural Transformation in India

Effects of Employment transformation from Agriculture to Non- agricultural sector in India

Please note: All data are at constant prices

List of Figures

Lewis graph

The share of employment among different sectors in India

People employed in agriculture and overall employment

GDP of agriculture and allied sectors (in US $ billions)

Farmer power availability on Indian farms

Trends of Nominal and Real Wage Rates (at 2001-02 Prices) in Rural and Urban India.

Introduction: Lewis Dual Sector Model

Currently in India we are observing that the number of labours are shifting from agriculture sector to other sectors of economy. The labour transition occurs due to several reasons one of the main reason is that the fixed wage rate in other sectors as compared to agriculture sector. In this context the Lewis model (Lewis, 1954) provides a good framework for explaining the ways in which the fruits of economic development are spread. Within a competitive market system, it is only when the economy emerges from the first, labour-surplus, classical stage of the development process and enters the second, labour-scarce, neo-classical stage that real incomes necessarily begin to rise generally. Up to that point the benefits of economic growth can accrue in the form of the absorption of surplus labour and not necessarily in the form of generally rising real incomes. The dual-sector model is a model in developmental economics. It is commonly known as the Lewis model after its inventor W. Arthur Lewis. It explains the growth of a developing economy in terms of a labour transition between two sectors, the capitalist sector and the subsistence sector.

Dual-sector model was enumerated by W. A. Lewis in his article entitled "Economic Development with Unlimited Supplies of Labour" written in 1954, the model itself was named in Lewis's honour. First published in The Manchester School in May 1954, the article and the subsequent model were instrumental in laying the foundation for the field of developmental economics.


1. The model assumes that a developing economy has a surplus of unproductive labour in the agricultural sector.
2. These workers are attracted to the growing manufacturing sector where higher wages are offered.
3. It also assumes that the wages in the manufacturing sector are more or less fixed.
4. Entrepreneurs in the manufacturing sector make profit because they charge a price above the fixed wage rate.
5. The model assumes that these profits will be reinvested in the business in the form of fixed capital.
6. An advanced manufacturing sector means an economy has moved from a traditional to an industrialized one.

W. A. Lewis divided the economy of an underdeveloped country into 2 sectors:

1. Capitalistic sector
2. Subsistence sector

Capitalistic Sector: Lewis defined this sector as "that part of the economy which uses reproducible capital and pays capitalists thereof". The use of capital is controlled by the capitalists, who hire the services of labour. It includes manufacturing, plantations, mines etc. The capitalist sector may be private or public.

Subsistence Sector: This sector was defined by him as "that part of the economy which is not using reproducible capital". It can also be adjusted as the indigenous traditional sector or the "self-employed sector". The per head output is comparatively lower in this sector and this is because it is not fructified with capital. The "Dual Sector Model" is a theory of development in which surplus labour from traditional agricultural sector is transferred to the modern industrial sector whose growth over time absorbs the surplus labour, promotes industrialization and stimulates sustained development.

In the model, the subsistence agricultural sector is typically characterized by low wages, an abundance of labour, and low productivity through a labour-intensive production process. In contrast, the capitalist manufacturing sector is defined by higher wage rates as compared to the subsistence sector, higher marginal productivity, and a demand for more workers. Also, the capitalist sector is assumed to use a production process that is capital intensive, so investment and capital formation in the manufacturing sector are possible over time as capitalists' profits are reinvested in the capital stock. Improvement in the marginal productivity of labour in the agricultural sector is assumed to be a low priority as the hypothetical developing nation's investment is going towards the physical capital stock in the manufacturing sector.

Relationship between Capitalistic and Subsistence Sector:

The primary relationship between the two sectors is that when the capitalist sector expands, it extracts or draws labour from the subsistence sector. This causes the output per head of labourers who move from the subsistence sector to the capitalist sector to increase. Since Lewis in his model considers overpopulated labour surplus economies he assumes that the supply of unskilled labour to the capitalist sector is unlimited. This gives rise to the possibility of creating new industries and expanding existing ones at the existing wage rate. A large portion of the unlimited supply of labour consists of those who are in disguised unemployment in agriculture and in other over-manned occupations such as domestic services casual jobs, petty retail trading. Lewis also accounts for two other factors that cause an increase in the supply of unskilled labour, they are women in the household and population growth.

The agricultural sector has a limited amount of land to cultivate, the marginal product of an additional farmer is assumed to be zero as the law of diminishing marginal returns has run its course due to the fixed input, land. As a result, the agricultural sector has a quantity of farm workers that are not contributing to agricultural output since their marginal productivities are zero. This group of farmers that is not producing any output is termed surplus labour since this cohort could be moved to another sector with no effect on agricultural output. Therefore, due to the wage differential between the capitalist and subsistence sector, workers will tend to transition from the agricultural to the manufacturing sector over time to reap the reward of higher wages. However even though the marginal product of labour is zero, it still shares a part in the total product and receives approximately the average product.

If a quantity of workers moves from the subsistence to the capitalist sector equal to the quantity of surplus labour in the subsistence sector, regardless of who actually transfers, general welfare and productivity will improve. Total agricultural product will remain unchanged while total industrial product increases due to the addition of labour, but the additional labour also drives down marginal productivity and wages in the manufacturing sector. Over time as this transition continues to take place and investment results in increases in the capital stock, the marginal productivity of workers in the manufacturing will be driven up by capital formation and driven down by additional workers entering the manufacturing sector. Eventually, the wage rates of the agricultural and manufacturing sectors will equalize as workers leave the agriculture sector for the manufacturing sector, increasing marginal productivity and wages in agriculture whilst driving down productivity and wages in manufacturing.

The end result of this transition process is that the agricultural wage equals the manufacturing wage, the agricultural marginal product of labour equals the manufacturing marginal product of labour, and no further manufacturing sector enlargement takes place as workers no longer have a monetary incentive to transition.

Lewis Graph:

In the given figure WW1 represents the capitalist sector; OW is the industrial wage. Given the profit maximization assumption, employment of labour within the industrial sector is given by the point where marginal product is equal to the rate of wages, i.e. OM. In the capitalist sector labour is employed up to the point where its marginal product equals wage, since a capitalist employer would be reducing his surplus if he paid labour more than he received for what is produced. But this need not be true in subsistence agriculture as wages could be equal to average product or the level of subsistence.

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Fig.1: Lewis graph

The total product labor ONPM is divided between the payments to labor in the form of wages, OWPM, and the capitalist surplus, NPW. The growth of the capitalist sector and the rate of labor absorption from the subsistence sector depends on the use made of capitalist surplus. When the surplus is reinvested, the total product of labour will rise. The marginal product line shifts upwards to the right that is to N1. Assuming wages are constant, the industrial sector now provides more employment. Hence employment rises by MM1. The amount of capitalist surplus goes up from WNP to WN1P'. This amount can now be reinvested and the process will be repeated and all the surplus labor would eventually be exhausted.

Lewis Dual Sector Model: Perspective of Different Countries.

So far very limited studies have been conducted on the topic of Lewis dual sector model or labour surplus theory. Even though it has few drawbacks but its applicability cannot be disregarded because knowingly or unknowingly countries like India, Thailand, China and other countries following this model. Especially countries like China, Africa, Cambodia and Vietnam were gone through enormous labour transition which helped in the development of economy of the respective countries. Agriculture in many countries is mainly characterized by the disguised unemployment that is marginal productivity of the agriculture labour is almost equal to zero. Due to heavy crowding of labour in one sector, work available per worker reduces the productivity of labour because two worker doing the same job where one worker is sufficient. Due to this situation even though the labour gets the work to do, but his income level reduces which in turn leading to decrease in standard of living of the labour. Decrease in income of the labour is mainly attributed to lack of continuous work and no fixed wage rate. In addition to this, wage rates of agricultural sector are much lower than that of other sectors. This made agricultural labourers to migrate to other sectors in search of fixed and higher wage rates to secure their livelihood.

Disguised unemployment is the main reason which is responsible for low productivity of labour in agricultural sector, if we transfer few labourers from agriculture to other sector then there will be increase in productivity in agriculture sector. Few studies have been undertaken in the Africa, Vietnam, Cambodia and China to verify the applicability of the Lewis dual sector model excerpts of those studies is given below Case of South Africa: Africa’s recent economic growth is at a historical high, the patterns associated with this growth appear to be quite different from the Asian experiences where rapid growth was fueled by labor intensive, export oriented manufacturing. Against this background, Lewis’s (1954) dual-economy model can be applied to the economies of Africa to better understand the role that the “in-between” sector has played in Africa’s recent growth. The coexistence of a closed and an open modern economy takes into account the diversity and heterogeneity of the activities that characterize modern African economies. In China and Vietnam and in many other Asian countries, large declines in the employment share in agriculture were matched by significant increases in the employment share in labor-intensive and export oriented manufacturing. Instead, the recent and significant decline in the employment share in agriculture in most African countries has been accompanied by a proliferation of small and medium-size enterprises in manufacturing, transportation, construction, and a wide range of services (Xinshen Diao and Margaret McMillan)

Case of Cambodia: Our results show that Cambodia has already reached rural Lewis turning point in 2011. This suggests that since 2011 Cambodia has faced at least labour shortage in some areas. However, we cannot find labor shortage at national level yet. Cambodia could face serious labor shortage issues in the coming years with the current trend of migration and expansion of urban and rural economy, and labor force growth. Anecdotal evidence of such shortage and wage increase was viewed by some as an indication that Cambodia may have depleted a previously vast supply of surplus labor. This finding has important policy implications for Cambodia’s future development. The country could face labor shortage in the coming years if there is no further unleash of labour through mechanization and productivity in agriculture sector. (Savuth Chengetal)

Case of China: Even casual observation suggests that the Chinese economy has many of the features that the Lewis model tries to capture. Findings lend support to the duality postulated by the Lewis model and the Turning Point prediction that ensues from it. By contrast, the neo-classical growth model, with its assumption of full employment, perfect mobility, and equalization of factor returns across sectors, does not seem to provide the right description of the Chinese economy. However, as Lewis himself noted, once the economy reaches the Turning Point and the duality disappears, the postulates of the neoclassical model may become applicable, though the issue of finding a satisfactory explanation of the technological progress, a task that the new growth models are struggling with, will still remain. (Nazrul Islam and Kazuhiko Yokota)

Case of Vietnam: Vietnam still enjoys a supply of surplus labor from the agricultural sector, with cheaper prices to the non-agricultural sector that offers relatively higher productive industries. It is also confirmed that there is still a diverging real wage rate gap between the sectors. Cheaper labor provided by the agricultural sector is a typical source of higher economic growth in developing countries. Policy supports are expected, including provision of job information for labor in order to encourage smoothing of the shift from the agricultural to the nonagricultural sector, along with appropriate vocational training if needed. Since Vietnam will not be able to utilize the surplus of labor after the turning point, with the increase of labor productivity and the real wage rate in the agricultural sector, it is necessary to advance the industrial transformation from labor intensive to capital intensive. (Takahiro YAMADA)

Table 1: Labour productivity of different countries in terms of value added per worker

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If we can try to interpret the results of the above studies we can say that applicability of Lewis Dual sector model in the countries like India is not just a assumption but a reality.

Lewis Dual Sector Model: Indian Perspective.

The importance of agriculture in Indian condition can never be over-stated. Although the share of agriculture in India’s GDP has been declining, yet agriculture and its allied sectors like forestry and fishing (but not including mining and quarrying) contributes nearly 14% to India’s GDP, accounts for about 11% of our exports, and supports half of our population’s livelihood, besides also being the source of raw material for a large number of industries. Despite its declining relative share in GDP, several innovative steps and measures are being undertaken and the sector has done reasonably in the last few years. It is evident that (fig.2) maximum amount of labour force is employed in the agriculture sector it clearly indicates the disguised unemployment exist in Indian agriculture as compared to other developing countries.

Data shows that India’s overall employment growth since 2004-05 has been anemic. At an average, only around 2 million people were added to the workforce since 2004-05 compared to around 12 million people that were added to the workforce every year as an average between 1999-00 and 2004-05. However, the addition to non-agricultural employment has actually been around 6 million people every year since 2004-05, as the workforce employed in agriculture had started declining in absolute numbers and consistently so, since then. The size of the workforce in agriculture declined by around 30.57 million between 2004-05 and 2011-12, although the size of the total workforce increased (FICCI Research). This is the first such period when a reduction in absolute numbers has been reported in agriculture.

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Source: FICCI report as on 2010-11

Fig. 2: The Share of Employment among Different Sectors in India

It has been observed that over time that as economies progress and move towards development, workforce tends to move away from primary sectors of the economy. Consistent with this empirical evidence observed worldwide, even in India, the percentage of people employed in agriculture has been consistently declining, from around 60 percent in 1999-00 to 49 percent in 2011-12.

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Fig. 3: People Employed in Agriculture and Overall Employment

Even though the share of agriculture workforce in total workforce decreasing over the years the GDP of agriculture is increasing over the years. The agricultural GDP which was 107.7 billion in 2010-11 is increased to 120.1 billion in 2013-14 without any substantial addition of labour to the agriculture sector.

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Source: Central Statistical Office, Government of India

Fig.4: GDP of agriculture and allied sectors (in US $ billions)

Fisher and Clark argued that income elasticity of demand for agricultural products being low, with rising levels of income, the demand for agricultural products relatively declines; while on the other hand income elasticity for industrial sector is high and for services, it is still higher. As a result, the demand for industrial goods increases and, after reaching reasonably high levels of income, demands for services increases sharply. It is thus that the share of different sectors in the national product gets determined by the changes in the patterns of demand accordingly. On the supply side, agriculture being mainly dependent on a fixed factor of production, i.e. land, faces a limit on its growth due to operation of the law of diminishing returns. Industry on the other hand, offers large scope for use of capital and technology, thus augmenting its productivity.

Table 2: Sectoral Employment Elasticity as per Twelfth Five Year Plan

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e employment elasticity indicates the ability of an economy to generate employment opportunities for its population as per cent of its growth (development) process. As we notice in the (table 5) the employment elasticity for agriculture is 0.04 which is very low as compared to other sectors indicating that labour addition to the agriculture is declining over a period of time as economy grows. Which can be interpreted as for every one percent increase in economy growth there is addition of workforce to the extent of 4 percent. As a contradiction if we consider manufacturing and other sectors which showing employment elasticity more than agriculture sector indicates that labour addition to these sectors is increasing as economy grows. If we consider all the sectors construction sector is showing highest employment elasticity among all the sectors. Construction sector has absorbed maximum number of labourers compared to other sectors.

Migration of workforce in India characterised by a shift of predominant share of agriculture to manufacturing activities and a moderate to high level of increase in the share of services both for the national product and the work force. The fast growth of service sector that is not preceded by any remarkable growth of manufacturing sector perhaps is one of the peculiar features of the transition in the Indian economy compared to the experience of developed countries It can be noticed (Table 3) that how structural transformation in workforce happened over a period of time. We can say by observing at the table that service sector and industry sector were grown substantially as compared to agriculture sector. Agriculture failed to cope up with the service sector and industry sector and there is substantial amount of labour transition from agriculture to service and industry sector. Apart from employment point of view from income point of view also service sector and industry sector growth rate is exceeded agriculture sector. It is clearly stated in the table that per cent of shift in labour force away from agriculture to other sectors is increasing over the years except in 1993-94 and 2009-10 i.e. 6.07 per cent , 4.67 per cent , 8.23 per cent , 4.73 percent

Table 3: Percentage Share of Employment and Income in Agriculture and Non-agricultural sector

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Source: Behera and Tiwari, 2015

Contribution of agriculture to the total GDP is decreasing and contribution of other sectors is increasing substantially (table 4). Among Industry and service sectors which showing increasing trend, service sector showing the higher increasing rate than that of the industry sector. This decreasing trend share of agriculture in total GDP indicates the substantial amount of labour moved away from agriculture to other sectors.

What India has achieved in terms of structural transformation in income in a span of sixty years is much quicker than what developed countries have taken in the historical course. The share of agriculture in GDP in India has declined from around 60 per cent in 1950-51 to 36.38 per cent in 1983 and further declined to 14 per cent in 2010-11. That of industry increased from 13 to 24 and reaches to 28 per cent and of services from 28 to 40 and further rises to 58 per cent.

Table 4: Movement of Indian Economy: Trends in GDP across sectors

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Source: DFI committee estimates

The difference is while most developed countries entered the phase of predominance of services in their economies after going through a phase of industrialisation but India straight away arrived into service sector dominance. There is some increased movement in the structural transformation in the last three decades since 1983, as 23.21 per cent shifted away from agriculture. This is much higher magnitude of shift compared to what was achieved in the first 30 years after Independence where only 4.7 per cent could come out of agriculture. There is an increased share of agricultural workers are moving out of agriculture and joining non-agricultural sector every decade.

Table 5: Percentage Share of Employment by Status to Total Employment

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Source: P. Venkatesh, 2013

During 1993-94 to 2009-10, the proportion of self-employment has decreased, and it is the lowest proportion for all workers since 1993-94. Casual workers have increased significantly in the rural areas compared to 2004-05, perhaps because of the impact of the NREGA. For regular-salaried workers, there has been a marginal increase. This suggests there must have been a transfer of the labour force from the agricultural sector to the modern sector. But overall there has been a declining growth of employment in modern sector. This suggests a slow process of transformation from agriculture to non- agriculture.

The available data from population census as well as NSSO clearly indicate that the interest of farming community in agriculture is declining and consequently the agricultural workers who are self- employed in agriculture are leaving the sector. This reported shift is good provided the workers, who left the sector, are productively and gainfully employed in alternate sectors/industries. If such shift continues the aggregate output from the sector would be shared among lesser number of persons engaged as cultivator in agriculture and indicate enhanced gains to those who continue to work in agriculture.

Pull and Push Factors Responsible for Shift of Labour from Agriculture to other Sectors:

There are two critical factors that affect the movement of labour away from the agriculture sector. The first is the “Pull” factor. With accelerated economic growth, job opportunities in non- agricultural sector are created much faster and this leads to a pull on labour away from agriculture to higher productive and higher paying manufacturing or services sector. However, India’s economic growth has lost its momentum signifying a low pull factor on labour away from agriculture. Moreover, in the non- agricultural sector, demand for labour has largely been informal in nature and mainly from small-scale enterprises. The proportion of informal labour and the small scale of employment (firm size) have also meant that productivity is relatively lower in India’s non-agricultural sectors. In other words the pull factor has not been strong. It can be much stronger if India embarks on a period of sustained high growth and reform its labour laws. Again, the shift from rural agriculture to urban manufacturing and services in India, has been happening at a slow pace. The urbanization rate in India is around 30% compared to 50% in China. While the trend of rural to urban migration is visible in India, the pace of migration has been quite slow, signifying slow and low pull factors at work.

Table 6: Trend in rural employment from 1987-88 to 2009-10 (in %)

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Source: Behera and Tiwari, 2015

Table 7: Disparities in Agriculture and Non-agriculture Income

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Source: Chand et al, 2015

It is clear from the above table (table 7) that income earned by the non-agriculture labour is well above the wage earning of agriculture labour. These disparities in income of agriculture and non- agriculture income became the major pull and push factors for the labour migration. On the other hand, the supply of labour from agriculture to other sectors is also affected by wages in the rural areas.

According to a survey conducted in 2011 to assess the key reasons behind migration of agriculture labour force to other sectors, ‘higher wages in other locally available jobs’ was ranked ‘first’ among various reasons identified. The survey reported that this was because higher wage rates prevailing in non-agricultural works like masonry, carpentry, electrical and plumbing, which were locally available, attracted agricultural labour force. As the skill set required in agriculture is negligible, labour tend to adapt other skill sets if they get higher wages. Agricultural jobs being seasonal, labour force remain unemployed during lean season. This makes them seek a regular / permanent job that could provide them income throughout the year. This reason was ranked ‘second’. Working as an agricultural labourer was considered as a low-esteem job in the rural areas and this reason was ranked ‘third’. Outmigration due to improvement in educational status, migration to nearby town / city for higher wages and migration to foreign countries were ranked the fourth, fifth and sixth respectively.

Another most important factor responsible for migration of labour from agriculture to other sector is size of land holding possessed by the Indians is decreasing over a period of time due to division land holdings over a period of time. Small size holdings with large number of working population reduced the agricultural productivity which in turn leading to decrease in the income levels of agriculture labour. As we see (table 9) that the number of land holdings below 0.5 hectors are increased from 48.127 million in 1995-96 to 64.679 million in 2010-11. At the same time number land holding which are above 20 hectors are decreased from 0.262 million in 1995-96 to 0.174million in 2010-11.

Table 8: Number and Average Size of Land Holding Across Land Size Classes

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Source: Agriculture census, 2010-11

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Source: Country presentation paper, Agriculture Machinery Manufacturers Association, India, 2015

Fig. 5: Farmer power availability on Indian farms

Farm mechanisation become the one of the major factor which is influencing the shift of labour from agriculture to other sectors.Due to farm mechanisation requirement of labour is decreasing over a period of time. The farm power available on Indian farms which was 1.05 kw/ha in 1995-96 is increased to 2.02 in 2013-14 indicating that farm mechanisation contributed much to the increase in productivity of agriculture sector as economy grows (fig. 5)

Apart from all these factors the foremost factor which has been influencing the shift of labour from agriculture to other sector is wage differentials between rural and urban areas,

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Source: Mehrotra et al., 2015

Fig 6: Trends of Nominal and Real Wage Rates (at 2001-02 Prices) in Rural and Urban India.

As we notice urban wages are always higer than that of rural wages both in terms of nominal and real terms over period of time. This is one of the major factor responsible for shift of labour.

Evidence of Lewis Dual Sector Model in different States of India:

Goldman Sachs (2014) calculated that labour is 4 times more productive in industry and 6 times more productive in services compared to agriculture. Higher productivity usually implies higher wages. Thus the natural movement away from agriculture. Such shifts are also coupled with technological advancement of the primary sector leading to lower labour intensity and higher capital investment in several instances. A comparison across two time periods, 2004-05 and 2011-12, indicates that while the size of the total workforce in the country increased by roughly around 10 million, the size of the agricultural workforce migrated was 30.57 million. In the process the share of agricultural workforce in total workforce declined from 56.7 per cent to 48.8 per cent in the same period (considering principal and subsidiary activities). It not only indicates that fewer people are being added to the workforce in agriculture but also highlights the net migration to other sectors. Between 2001 and 2011, India added 181.5 million to its population, half of which was in the rural areas.

India is characterised by the diverse nature of climatic conditions across the country. Each state characterised by different type of cropping pattern and different types of industries. Some states may be predominant in industries and some states may predominant in agriculture or for that matter in any sector. Hence it is necessary to study each state separately and find out what is trend in labour shift from agriculture to other sectors in different states.

Reddy Amarendra (2013) in his research paper Trends in rural wage rates: whether India reached Lewis turning point opined that “After liberalisation of Indian economy in early 1990s, India’s GDP growth rates have been picked up and there is a sign of speeding up of structural transformation in Indian economy with the share of agriculture in GDP reduced to 12 per cent. The economic reform and “opening up” policy since the late 1990s have greatly promoted India’s economic growth. Rapid industrialization in some of the states has generated vast employment opportunities, absorbing surplus labour from rural areas”.

In the present paper used the data set for the 2004-05 and 2009-10 from hand book of statistics which is published by RBI and indiastat and other sources. The data set consists of labour employed in agriculture, manufacturing, non manufacturing and service sector.

In order to find out the labour productivity following formula has been used Labour productivity= Total output produced/Number persons employed in the production Uttar Pradesh is leading in generation of employment in agriculture but amount is decreased as compared to the year 2004-05(table 10). Even though there is decrease in employment generation there is no sign of decrease in production level in fact it is increased from 37.83 million tonnes in 2004-05 to 43.19 million tonnes in 2009-10.When we consider Uttar Pradesh in 2004-05, it is leading in number agriculture labour employed in agriculture i.e. 43.3 million which resulted in the decrease in productivity to the extent 0.87 but when we look at the year 2009-10 its agriculture labour force reduced to 39.8 million which resulted in increase in labour productivity by 0.21 (1.05) in absolute terms. Which indicate that migration of labour from agriculture to other sector increased the labour productivity. At the same time in Uttar Pradesh there is increase in amount workforce in non-manufacturing sector from 3 million in 2004-05 to 7.2 million in 2009-10. The detailed comparison about other states is given below tables

Table 9: State wise Employment generation in Agriculture, Manufacturing, Non-manufacturing, Service sector and Production and Labour Productivity comparison as on 2004-05

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Source: Compiled and computed from NSSO,,,

Table 10: State wise employment generation in agriculture, manufacturing, non-manufacturing, service sector and production and labour productivity comparison as on 2009-10

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Source: Compiled and computed from NSSO,,,

Transition in labour force during 2004-05 to 2009-10 and its effect on agriculture production and labour productivity can be seen in below table (table 11). Here we can infer that Bihar, Chhattisgarh, Jharkhand, Punjab, Rajasthan and Haryana are leading in labour transition respectively. Even though there is more amount labour transition in these states there is no such negative impact on production and labour productivity of these states. Which tells that labour transition from agriculture sector to other sector lead to increase in productivity of agricultural labour which is basically suffering from disguised unemployment.

Table 11: State wise Net Absolute change in Employment generation in Agriculture, Manufacturing, Non-manufacturing , Service sector and Production and Labour Productivity comparison between the Periods of 2004-05 and 2009-10

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Source: Compiled and computed from NSSO,,,

Table 12: States which showing more than 10% labour transition rate (Base year 2004-05)

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Source: Compiled and computed from NSSO,,,

-Indicates that the labour are moving to other sector

Table 13: States which showing 5-10% labour transition rate(Base year 2004-05)

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Source: Compiled and computed from NSSO,,,

Table 14: States which showing 1-5% labour transition rate (Base year 2004-05)

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Source: Compiled and computed from NSSO,,,

The maximum percentage transition in the agricultural employment was observed in the states like Rajasthan followed by Jharkhand, Chhattisgarh and Bihar but there was no negative impact on production of agricultural crops in those states (table 12). Rajasthan, Jharkhand, Chhattisgarh and Bihar in spite having high labour transition rate they are showing the increase in productivity of agricultural labour due to movement of labour from agriculture to other sectors mainly to non- manufacturing and service sectors. Even though Rajasthan and Jharkhand showing higher labour transition they are showing increase in labour productivity i.e. 0.25 and 0.14. The majority of the states are showing positive signs in case labour productivity even though there is substantial of shift in labour force from agricultural sector to other sectors, which gives the clue for applicability of Lewis dual sector model. This also true in case low labour transition states. So we can say that as economy matures, there is a movement of excess agricultural workers from low productivity agriculture to higher productivity sectors like non-manufacturing sector and thus from rural to urban areas, and from lower wages to higher wages. The pace of this movement accelerates with higher economic growth, which gives rise to greater job opportunities in the non-agricultural sectors. Migration of labour from agriculture to other sectors lead to increase in income levels of people living rural areas which can be depicted in the form of specific poverty lines which has been increased over the years in the states which witnessed the labour migration.

Table 15: Sate specific poverty lines (Rs per capita per month)

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We exclude Punjab and Maharashtra because they witnessed the increase in labour addition to the agriculture sector due to green revolution and adoption of HYVP varieties which are labour intensive. If we look at the states of Uttar Pradesh and Andhra Pradesh which witnessed the double jump in the poverty line. The states which witnessed maximum amount labour transition are Rajasthan and Haryana are also showing the improvement in poverty line almost to the extent double in 2009-10 as compared to the situation in 2004-05.

With agriculture being the mainstay in rural areas, what it signified was that enough labour should be available for agriculture. Moreover, agriculture in India has been characterized by a high degree of disguised unemployment. In other words even if some amount of labour was taken out from agriculture there would be no difference to output and productivity. This has been the popular perception. Moreover, yields, especially for food grains have been increasing in the last several years. As per data from the Ministry of Agriculture, Directorate of Economics and Statistics and the Compound Annual Growth Rate (CAGR) of food grains yield between 1999-2004 was 0.1 per cent which is increased to 2.5 per cent between 2004-2009. Increase in yield, it is argued could not have been possible if there was a shortage in agricultural labour. However in reality, the magnitude and pace of the shift away from agriculture has been substantial as has been evidenced here. The below table indicates the expected projection and growth rate in agriculture labour workforce which has been decreasing over the years signifying that enough amount of labour force is migrating towards the manufacturing, non- manufacturing and service sector.

Table 16: Estimation of Labour Force Reduction in Agriculture by 2019-20

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Source: Planning Commission, Economic Intelligence Unit, KPMG Analysis

Estimating Rate of Structural Transformation in India (Deepak Kumar Behera and Mitali Tiwari)

The dynamic change in structural transformation can captured more rigorously from estimating the rate of change of structural transformation (RST). If Lt is the total workforce of the economy and Ln is the non-agricultural (sum of industry and services) workforce, then the share of the non-agriculture is given by Ln/Lt, which is also a measure of the degree to which a developing economy has diversified its production base. The rate of structural transformation may then be defined as the increment in Ln/Lt ratio per annum. Then the rate of structural transformation is:

Thus the rate of transformation contemplated as rate of change of ratio of non- agricultural employment to total employment over period, is the ratio multiplied by the difference between the incremental change in non-agricultural and total employment. We have estimated the RST for two types of transformation: (a) from agricultural to non-agricultural and (b) from informal sector to formal sector. The Rate of Transformation in terms of output has really accelerated. Compared to the pre-Reform period (1973-91), it has accelerated from 0.56 percent to 0.863 percent during 1991-10 (table 17)

Table 17:

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While there is no commensurate growth in rate of structural transformation (RST) in occupational terms, nevertheless, there has been some transformation in the recent period. The RST of agricultural work to non-agricultural work has increased marginally from 0.57 to 0.586. This is even faster when we consider agricultural work to unorganized non-agricultural work, where it has increased from 0.598 to 0.705. Whereas, it has clearly worsened regarding RST of agricultural to organized work, it declined from -0.023 to -.108 percent. Similarly, it has equally worsened in case of unorganized work to organized work, from -0.026 to -0.114 percent between the pre- and post-reform periods.

In conclude, first of all, output transformation is lot quicker than in employment for the past quarter century in India, which further accelerated in the post-reform period. Second, the occupational transformation from agriculture to non-agriculture has marginally increased, while from agriculture to un-organised non-agriculture has remarkably improved. Thus it suggests that now there is a movement in the occupational transformation, but it is totally in terms of movement towards unorganized (modern) sector.

Determinants of Structural Transformation: An Econometric Estimation (Behera and Tiwari)

In order to know the strength of various factors that may determine its movement we shall undertake a simple econometric exercise. The list of variables that are considered to have impact on rate of employment transformation are urbanisation, non-agricultural income, non-agricultural investment, technology used in non-agricultural sector, non-agricultural informal employment, rural- urban wage differential and skilled labour. Such variables are now presented in the following equation.

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The above equation for structural transformation on employment can be estimated for the both the categories, first, for agriculture to non-agricultural sector, and second from informal to formal sector. The specification for the latter is as in the following:

Empirical Results:

Table 18: Effects of Employment transformation from Agriculture to Non-agricultural sector in India

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It has a reasonable goodness fit with an explanatory power of 0.77. The estimated coefficients of all the variables are found to be significant and have expected signs. Estimated results corroborate the view that the transformation from agriculture to non-agricultural employment has positively influenced by non-agricultural income, non-agricultural investment, non-agricultural informal sector work force, rural-urban real wage differential and human capital and variables like urban population and non- agricultural capital-labour ratio have negatively influenced the transformation in the economy. From the result, we found that, first, share of non-agricultural informal sector work force has the highest coefficient value, suggesting one unit increase in share of non-agricultural informal sector work force will lead to 0.641 unit increase in share of employment transformation rate from agriculture to non-agricultural sector. Second, human capital has the second highest coefficient value of 0.047. Third, one percent increase in share of non-agricultural income leads to 0.042 unit increases in employment transformation in the economy. Fourth, investment which determines the employment transformation by Lewisian model suggests 0.027 unit increase by each unit share of investment. Fifth, wage differential which determines the rural-urban migration shows a positive impact to the employment transformation from rural agriculture to urban non-agricultural sector. On the other hand, urban population and share of capital-labour ratio in non-agricultural sector decreases employment transformation by 0.072 and 0.032 respectively. Liberalisation dummy positively affects the employment transformation in the economy but the coefficient is very negligible. From the above explanation, it can be observed that due to informal sector growth in terms of employment and growth in non-agricultural sector income has some deterministic influence on employment transformation from agricultural sector to non-agricultural sector.

Drawbacks of the Lewis Dual Sector Model

The validity and usefulness of the labour-surplus model of Lewis for developing countries like India depend upon the extent to which their underlying assumptions are valid for the economies in question. We are here not interested in validity of all the assumptions, explicitly or implicitly, made in this model. The basic premise of the model is that industrial growth can generate adequate employment opportunities so as to draw away all the surplus labour from agriculture in an overpopulated developing country like India but industrial growth rate is not to the extent we are expecting. Thus, the generation of adequate employment opportunities and as a result the absorption of surplus labour from agriculture in the expanding industrial sector has not proceeded as predicted by Lewis model

1. Lewis model neglects the importance of labour absorption in agriculture:

A grave weakness of the models of Lewis is that they he ignored the generation of productive employment in agriculture. No doubt, Lewis in his modified and extended version of Lewis model envisaged an important role for agricultural development so as to sustain industrial growth and capital accumulation. But they visualize such an agricultural development strategy will release labour force from agriculture rather than absorbing them in agriculture.

2. Assumption of adequate labour-absorptive capacity of the modern Industrial sector:

Another shortcoming of development model of Lewis is his assumption that the growth of industrial employment (in absolute amount) will be greater than the growth in labour force (which in India at present is of the order of about 8 million people per year). Because only then the organised industrial sector can absorb surplus labour from agriculture. The employment potential of industrial sector is so little that far from withdrawing labour currently employed in agriculture. An important drawback of Lewis model is that it has neglected the importance of agricultural growth in sustaining capital formation in the modern industrial sector. When as a result of the expansion of capitalist modern sector, transfer of labour from agriculture to industry takes place, the demand for food-grains will rise. If the output of food-grains does not increase through agricultural development to meet the additional demand for food-grains, prices of food-grains will rise. With the rise in prices of food-grains wages of industrial labour will increase. Rise in wages will lower the share of profits in the industrial product which in turn will slow down or even choke off the process of capital accumulation and economic development. Thus, if no allowance is made for agricultural growth, the expansion of modern sector and capital accumulation is bound to be halted. Thus, neglect of agriculture in the development strategy pursued in India since the Second Plan virtually resulted in stagnation in the industrial sector, during the period 1966-1979.

3. The Assumption of Constant Real Wage Rate in the Modern Sector:

The assumption of constant real wages to be paid by the urban industrial sector until the entire labour surplus in agriculture has been drawn away by the expanding industrial sector is quite unrealistic. The actual experience has revealed a striking feature that in the urban labour markets where trade unions play a crucial role in wage determination there has been a tendency for the urban wages to rise substantially over time, both in absolute terms and relative to average real wages even in the presence of rising levels of urban open unemployment. The rise in wages, as explained above, seriously impairs the development process of the modern sector.

4. It neglects the labour-saving nature of technological progress:

A serious lacuna of the Lewis model from the viewpoint of employment creation is its neglect of the labour saving nature of technological progress. It is assumed in the model that, greater the rate of growth of capital formation in the modern sector, the greater the creation of employment opportunities in it. But if capital accumulation is accomplished by labour-saving technological change, that is, if the profits made by the capitalists are reinvested in more mechanised labour saving capital equipment rather than in existing types of capital, then employment in the industrial sector may not increase at all.

5. Lewis Model Ignores the Problem of Aggregate Demand:

A serious factor which can slow down or even halt the expansionary process in Lewis model is the problem of deficiency of aggregate demand. Lewis assumes, though implicitly, that no matter how much is produced by the capitalist or modern sector, it will find a market. Either the whole increment in output will be demanded by the people in the modern sector itself or it will be exported. But to think that entire expansion in output will be disposed of in this manner is not valid. This is because a good part of the demand for industrial products comes from the agricultural sector. If agricultural productivity and therefore incomes of the farming population do not increase, the problem of shortage of aggregate demand will emerge which will choke off the growth process in the capitalist industrial sector.

Despite several limitations and drawbacks Lewis model retains a high degree of analytical value. It clearly points out the role of capital accumulation in raising the level of output and employment in labour-surplus developing countries. The model makes a systematic and penetrating analysis of the growth problem of dual economies and brings out some of crucial importance of such factors as profits and wages rates in the modern sector for determining the rate of capital accumulation and economic growth. It underlines the importance of inter-sectoral relationship (i.e., the relationship between agriculture and the modern industrial sector) in the growth process of a dual economy.

India being populous country and increasing rate of its population growth made it inevitable to think of Lewis dual sector model. Day to day in real life instances we regularly notice that in urban areas so many people migrated from rural areas in search of secure livelihood which agriculture failed to give due to its seasonality and menace of disguised unemployment. Important factor to consider that in India land holdings owned by the majority of the people are of small holdings where it is very uneconomical to increase labour productivity by adopting improved technologies.

However the data used for this analysis mainly pertains to the year 2004-05 and 2009-10 because the recent labour census has yet to took place, so there is gap of almost 6 years in this period there has been lots of changes have took place to make us think that Lewis dual sector model applies to the Indian condition now also. There is need of re-examination of it.


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economic, india, developmental, economics, lewisdualsectormodel, lewis, dual, sector, model, labour trasition, lewis dual sector model, indian labour, labour transition in india, ashok taradale, developmental economics, labour surplus theory, applicability of lewis dual sector model
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