The agricultural productivity gap: Informality matters

The measured agricultural productivity gap (APG) in developing countries typically compares agriculture with the entire non-farm economy, implicitly treating the latter as homogeneous. In developing countries, most non-farm employment is informal, concentrated in small, unregistered enterprises with low productivity. This paper compares the productivity of agriculture to the informal and formal non-farm sectors in India. Using Indian sectoral data from the India KLEMS database linked with nationally representative labor surveys, we decompose the non-farm economy into formal and informal segments and adjust productivity measures for differences in hours worked, human capital, and labor's share of value-added. We find that the APG is almost entirely driven by the small formal non-farm sector. The gap with the informal sector is negligible. Between 63 and 75 % of non-farm workers are in informal employment dominated industries that are not more productive than agriculture. These results reframe the APG as a formal–informal divide.