Structural change and labour productivity trend in the non-agricultural sector: a study of Asia

Over the course of structural transformation in the production and employment front, trend in labour productivity ratio between non-agricultural and agricultural sectors has been noted to behave differently for many developing countries. This study develops a two-sector dual economy model to explain the different trends in labour productivity of the non-agricultural sector relative to the agricultural sector in a labour surplus economy. In this model, the rates of growth of output of the agricultural and the non-agricultural sectors are exogenously given and the rate of growth in labour productivity in the high productivity sector is exogenously determined by the pace of technological progress. Alternatively, labour productivity in the agricultural sector which acts as a residual sector in terms of employment generation is endogenously determined by the release of surplus labour from the agricultural sector and its absorption in the non-agricultural sector. The long run relative labor productivity of the agricultural sector with respect to the non-agricultural sector approaches unity depending on growth rate of labor force, productivity growth in non-agriculture, and growth rate of agriculture itself. To check for the validity of the postulations of the model, using data from eight East Asian countries over 1970-2014, we have estimated the relationship between labour productivity ratio of the agricultural and the non-agricultural sectors and labour absorption capacity of the non- agricultural sector, controlling for technological development of the country and growth of the sectors. In our estimation results we find a strong significant relation between labour absorption in the non-agricultural sector and labour productivity ratio of the agricultural and the non-agricultural sectors.