Structural Transformation and Absorption of Surplus Labour

The process of economic growth and development involves transformation of the structure of economies that results in a reduction in the share of agriculture and a rise in the share of industries and services in total output as well as employment. Although manufacturing is expected to play the role of the engine of growth and absorption of surplus labour, the experience of developing countries shows that all countries have not been equally successful in this regard. That has led to the search for alternative pathways to the absorption of surplus labour. The present paper addresses this question with particular focus on selected countries of South Asia, viz. Bangladesh, India and Nepal. The analysis is more detailed on Bangladesh, and focuses on whether surplus labour has been exhausted and on how effective the alternative pathways can be. The empirical evidence presented in this paper indicates that it is difficult to utilise the available surplus labour fully and productively without industrialisation. Of course, there are differences in conditions and possibilities even within South Asia. But the limitations of the service sector as an engine of overall economic growth and as a means of absorbing surplus labour seem to be clear. For Bangladesh, data on real wage trends and the persistence of low quality employment show that despite labour market tightening, the economy of the country continues to exhibit signs of the existence of surplus labour.