Lewis dual sector model and its applicability to Indian agriculture

WELCOME ALL
Major Advisor
Dr. P. S. Srikantha Murthy
Seminar Teachers
Dr. K. B. Umesh
Dr. H. Lokesh

Lewis Dual Sector Model
and Its Applicability to
Indian Agriculture.
First seminar
on

Presented by
Ashok M Taradale
Sr. MSc (Agri)
PALB 6110
Dept. of Agril. Economics
UAS, GKVK, Bengaluru

Flow of Presentation
• Introduction
• Applicability of Model in Different Countries
• Applicability of Model to Indian Condition
• Pull and Push Factors Responsible for Shift of Labour from
Agriculture to other Sectors
• Labour Transition in different States of India
• Case study
• Drawbacks of the Lewis Dual Sector Model
• Conclusion
1

Introduction:
• Arthur W Lewis - "Economic Development with Unlimited
Supplies of Labour" written in 1954.
• It explains the growth of a developing economy in terms of
a labour transition between two sectors, the capitalist sector
and the subsistence sector.
2
Sir William Arthur Lewis (23
January 1915 – 15 June 1991) was a
Saint Lucian economist well known
for his contributions in the field of
economic development. In 1979 he
won the Nobel Memorial Prize in
Economics.

Assumptions
1. Agricultural sector has a surplus of unproductive labour.
2. Workers are attracted to the growing manufacturing sector.
3. Wages in the manufacturing sector are more or less fixed.
4. Entrepreneurs in the manufacturing sector make profit.
5. Profits will be reinvested in the business.
6. An advanced manufacturing sector means an economy has
moved from a traditional to an industrialized one
3

Relationship between capitalistic and
subsistence sectors:
• W. A. Lewis divided the economy of an developing
country into 2 sectors:
Subsistence
Sector
Capital
Sector
Surplus
Labour
Employment
Creation
4

Lewis Graph
Y
X
Industrial Wage
Subsistence Wage
P’P
M M1
N1
N
W
W1
0
Labour
WageandMarginalProduct
Fig 1: Lewis graph
5

Applicability of Lewis Model in Different
Countries.
• Few studies have been undertaken in Africa, Vietnam,
Cambodia and China to verify the applicability of the Lewis
dual sector model.
6
Case of Vietnam:
• Takahiro Yamada said that “Vietnam still enjoys a supply
of surplus labour 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.”

Case of South Africa:
• Xinshen Diao and Margaret McMillan opined that
“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 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”
7

Case of Cambodia:
• Savuth Cheng et al. in their study concluded 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.”
• Nazrul Islam and Kazuhiko Yokota said that “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”8
Case of China:

Table 1:Agriculture Labour Productivity of different countries
in terms of value added per worker (at constant 2010 US $)
China India Vietnam S.Africa
2004 884.49 908.59 642.6 5574.74
2005 930.08 942.39 660.66 5876.61
2006 975.72 967.94 676.55 5704.55
2007 1010.08 1015.76 695.26 5965.75
2008 1064.18 1005.07 718.69 7305.69
2009 1109.43 1001.76 723.61 7361.07
2010 1160.53 1075.83 719.06 7542.89
2011 1214.32 1117.52 741.94 7919.95
2012 1275.54 1122.1 756.67 8296.87
2013 1332.79 1172.47 770.31 8923.22
2014 1397.62 1158.85 791.29 9826.31
2015 1465.43 1156.21 805.72 9507.75
Source: www.wto.org
9

Applicability of Model to Indian Condition
Total Population
1.2 billion
Total workforce
467 million
Rest of population
743 million
Agriculture sector
228.3 million
Secondary sector
110.7 million
Tertiary sector
127.8 million
Source: FICCI report, 2015
Fig 2: Workforce distribution in India10

Contd…
500
450
400
350
300
250
200
150
100
50
0
1999-00 2004-05 2009-10 2011-12 Years
397
238
59.9%
457
259
56.7%
460
245
53.3%
467
228
48.8%
Source: NSSO and FICCI Report.
Total Work force (in millions)
Agricultural work force(in millions)
Fig 3: People Employed in Agriculture and Overall Employment
11
Labourforceinmillion
X
Y

Contd…
• Migration of workforce in India characterised by a shift
of predominant share of agriculture to manufacturing
activities and service sector
• 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.
• 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.
12

Table 2: Size of labour force by sectors
• Source: Mehrotra et al., 2015
13
Sectors
Absolute number (in million)
1993-94
1999-
2000
2004-05 2009-10 2011-12
Agriculture 241.5 246.6 268.6 244.9 231.9
Manufacturing 38.9 42.8 53.9 50.7 59.8
Non-
Manufacturing
15.8 20.4 29.4 48.3 55.3
Service 77.7 89.8 107.3 116.3 127.3
Total Work
force
374.00 399.5 459.1 460.2 474.2

Contd…
• Between 2009-10 and 2011-12 employment in
manufacturing and non manufacturing taken together
grew by 16.1 million increment of 15.7 million.
• Employment growth rate in the manufacturing sector at
8.5 per cent between 2009-10 and 2011-12 surpasses the
employment growth rate in all sectors.
• In complete contrast to the first half of the decade during
2004-05 to 2009-10 there was an absolute withdrawal of
around 21 million workers.
• The rise in regular work is a reflection of the very rapid
GDP growth that occurred between 2003-04 and 2011-12
of 8.4 per cent per annum.
14

Table 3: Employment and change in employment by sector and
type of employment
Source: Mehrotra et al, 201515
Sectors
Absolute Volume of Employment (in million)
1999-2000 2004-05 2009-10 2011-12
SE RE CL SE RE CL SE RE CL SE RE CL
Agri 142.4 3.5 100.6 172.3 2.9 93.3 147.1 2.1 95.6 151 1.9 78.9
Mnfg 22.2 13.0 7.6 28.6 15.9 9.3 24.6 16.4 9.8 29.3 20.5 9.9
Non-
Mnfg
3.2 2.6 14.5 4.8 3.0 21.6 5.3 4.1 38.9 5.7 5.3 44.3
Service 43.2 36.8 9.8 55.4 43.6 8.2 57.5 49.1 9.7 61.6 56.9 8.8
Total 211.1 55.9 132.5 261.2 65.4 132.5 234.6 71.7 153.9 247.7 84.7 141.9

Table 4: Sectoral Employment Elasticity as per Twelfth
Five Year Plan
Source: 12th Five Year Plan Document, Chapter 22
Sector 1999-2000 to 2009-10
Agriculture 0.04
Manufacturing 0.09
Mining and Quarrying 0.52
Utilities 0.04
Construction 1.13
Trade and Transport 0.19
Finance, Real estate 0.66
Other sectors 0.08
All sectors 0.19
16

Contd..
• Labour bureau- Employment and unemployment survey
revealed that during 2013-14 to 2015-16 across various
sectors, the largest decline in the employment was
experienced in the primary sector both in rural and urban
area.
• Mehrotra et al accounted for a decline of about 130 lakh
agriculture labour during 2009-10 and 2011-12
• Post 2009-10 out of total 27.1 million increase in non
agricultural employment, 24 million had been in the MSE.
17

Contd…
• Goldman Sachs (2014) calculated that labour is 4 times
more productive in industry and 6 times more productive
in services compared to agriculture in India.
• Sharmistha Sinha and Ankita Gandhi said that “The size
of the workforce in agriculture declined by around 30.57
million between 2004-05 and 2011-12. In the same period
non agricultural employment grew by 25 million which is
how total employment grew by 1.1 million”
• During 2004-05 and 2009-10 non agriculture employment
grew by 7.5 million per annum.
18

Table 5: Percentage share of employment in
Agriculture and non agriculture sectors
Year
Employment Shift in
Labour
Force away
From
Agriculture
Agriculture Non- agriculture
Industry Service Total
1972-73 74.58 06.75 18.67 25.42
1983 68.51 13.83 17.67 31.49 6.07
1987-88 64.97 15.93 19.10 35.03
1993-94 63.84 15.01 21.16 36.16 4.67
1999-00 60.27 16.22 23.50 39.73
2004-05 56.50 18.70 24.79 43.50 8.23
2009-10 51.76 21.93 26.30 48.23 4.73*
Source: Behera and Tiwari, 2015
19

Contd..
• 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.
• Table 6: GDP of agriculture and allied sectors at constant
prices
Source: FICCI Report, 2016
Year 2010-11 2011-12 2012-13 2013-14
Agriculture and allied sector GDP
(US $b billions)
107.7 113.1 114.7 120.1
20

Contd..
• Sharmistha Sinha and Ankita Gandhi : Since 2004-05 the
structural shift in employment, increase in rural wages and
increase in per capita expenditure caused the decline in the
absolute number of poors.
• The absolute number of poor fell from 407 million in
2004-05 to 356 million in 2009-10 and further to 269
million 2011
• Expenditure on processed food and beverages increased
from 4.5 per cent to 5.8 per cent, on clothing and bedding
increased from 4.5 per cent to 6.3 per cent, on durable
goods increased from 3.4 per cent to 6.1 per cent and on
foot wear also increased from 0.8 per cent to 1.3 per cent
during 2004-05 to 2009-10.
21

Pull and Push Factors Responsible for
Shift of Labour from Agriculture to other
Sectors
• During 2004-05 and 2009-10 there had been a remarkable
and historic shift in the rural wages due to spill over effect
of MGNREGA, higher participation in the education and
farm mechanisation
• 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.
22

Table 7: Trend in rural employment from 1987-88 to 2009-10 (in per cent)
Employment sector
Male workers Female Workers
1987-
88
1993-
94
1999-
00
2004-
05
2009-
10
1987-
88
1993-
94
1999-
00
2004-
05
2009-
10
Farm 74.7 73.8 71.3 66.2 62.5 82.6 84.6 84.0 81.6 78.8
Non- Farm
a.Manufacturing 7.7 7.0 7.3 8.0 7.1 7.5 7.5 7.7 8.7 7.6
b. Trade, hotel
and restaurant
5.3 5.5 6.8 8.3 8.2 2.4 2.2 2.3 2.8 3.1
c. Construction 2.7 3.3 4.5 6.9 11.4 3.2 1.1 1.2 1.7 4.2
d.Transport,
Storage and
communication
2.1 2.2 3.2 3.9 4.2 0.1 0.1 0.1 0.2 0.3
e. Mining and
Quarrying
0.7 0.7 0.6 0.6 0.8 0.5 0.5 0.4 0.4 0.3
f. Other services
6.8 7.4 6.3 6.1 5.8 3.7 4.0 4.3 4.6 5.7
Source: P. Venkatesh, 2013
23

Trends of Nominal and Real Wage Rates (at 2001-02 Prices)
in Rural and Urban India.
Fig4: Trends of Nominal and Real Wage Rates (at 2001-02 Prices) in Rural and Urban
India.
24

Table 8: Real Daily Wage Rates (In RS,in 2001-02 prices)
25
Occupations
Real Daily Wage Rates (In RS, in 2001-02 prices)
1993-94 1999-2000 2004-05 2007-08 2009-10 2011-12
Rural Areas
Professional
and admin
91.62 167.81 193.95 182.63 211.42 227.34
Clerical
Jobs
99.73 142.11 158.10 173.29 198.36 191.36
Sales and
services
16.91 70.32 69.25 87.93 102.51 107.18
Agriculture
and allied
15.08 34.14 39.79 51.10 56.44 73.11
Crafts and
trade
workers
24.26 54.47 56.69 79.84 79.51 92.31
Plant and
machine
operators
43.26 85.06 92.25 97.99 96.78 107.39

Contd…
Occupations
Real Daily Wage Rates (In RS, in 2001-02 prices)
1993-94 1999-2000 2004-05 2007-08 2009-10 2011-12
Urban Areas
Professional
and admin
154.90 277.17 317.26 365.04 377.14 390.57
Clerical
Jobs
148.53 186.93 210.34 217.96 245.71 240.08
Sales and
services
42.22 90.96 88.58 115.42 129.26 135.94
Agriculture
and allied
24.07 55.91 50.24 92.57 126.39 110.30
Crafts and
trade
workers
54.13 89.09 85.42 107.19 111.35 121.72
Plant and
machine
operators
81.59 112.21 115.58 133.07 148.54 149.23

Contd…
• The disparities in income of agriculture and non
agriculture income became the major pull and push
factors for the labour migration
• The ratio of income earned by cultivator and non-
agriculture labour is increasing over period of time
indicating that increased wages prevailing in the non
agricultural sector caused the shift of labour rom
agriculture to other sectors.
• The ratio of income per non agriculture worker and wage
earning per agriculture per worker is increasing over a
period of time.27

Table 9: Disparities in Agriculture and Non-agriculture
Income
Year
Farm
Income per
cultivator
(Rs) F
Wage
Earning
per
agricultural
labourer
(Rs) L
Income per
non-
agriculture
worker (Rs)
N
Ratio L:F Ratio N:F
1983-84 04286 01467 012786 0.34 2.98
1987-88 05653 02201 018036 0.39 3.19
1993-94 12365 04784 037763 0.39 3.05
1999-00 24188 08938 078565 0.37 3.25
2004-05 26146 10043 106688 0.38 4.08
2011-12 78264 32311 246514 0.41 3.15
Source: Chand et al, 2015
28

Contd…
• Another most important factor responsible for
migration of labour from agriculture to other sector is
size of land.
• Small size holdings with large number of working
population reduced the agricultural productivity.
• The number of land holdings below 0.5 hectors have
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 have decreased from
0.262 million in 1995-96 to 0.174million in 2010-11
29

Contd…
• Farm mechanisation become the one of the major factors
which is influencing the shift of labour from agriculture
to other sectors
1.05
1.47
1.73
1.8
4
2.02
1995-96 2005-06 2011-12 2012-13 2013-14
Farm Power available (kw/ha)
Source: Country presentation paper, Agriculture Machinery Manufacturers Association, India
Fig 5: Farmer power availability on Indian farms
30

Labour Transition in different States of India
• Reddy Amarendra (2013) in his research paper 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”
• Rapid industrialization in some of the states has
generated vast employment opportunities, absorbing
surplus labor from rural areas.
• It is noted that mechanisation in agriculture particularly in
states such as Uttar Pradesh, Bihar, Jharkhand, Chhattisgarh,
Karnataka, Andhra Pradesh and West Bengal led to fall in
employment.
31

Contd…
• We classified the states into three categories
1. States with >10 per cent labour transition rate
2. States with 5-10 per cent labour transition rate
3. States with 1-5 per cent labour transition rate
32

Table 10: States which showing more than 10 percent labour transition rate
between 2004-05 to 2009-10
State
Net migration
(in %)
Production
(in ‘000)
Labour
Productivity
Bihar -12.7 2446.2 0.23
Chhattisgarh -16.1 -0120.2 0.19
Jharkhand -16.3 -0158.9 0.14
Punjab 11.4 1279.4 -1.40
Rajasthan -18.1 0199.3 0.25
Haryana -0010 02248 0.95
State
Net migration (in
%)
Production
(‘000)
Labour
Productivity
Assam -8.4 863 0.18
Gujarat -9.9 503.5 0.11
Karnataka -7.1 460 0.12
Kerala -08 -60.1 0.01
Maharashtra 7.2 2045.6 0.00
Uttarakand -8.1 35 0.10
West Bengal -5.6 -313.9 0.03
Table 11: States which showing 5-10 percent labour transition rate between
2004-05 to 2009-10
33
Source: Author’s Computation from NSSO, www.indiastat.com and RBI handbook data

•Even though Rajasthan and Jharkhand showing more than 10
per cent 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.
State
Net Migration
(in %)
Production
(‘000)
Labour
Productivity
Andhra Pradesh -1.6 1899 0.10
J and K -4.5 -184.8 -0.08
Orissa -4.9 663.2 0.13
Tamil Nadu -4.6 1335.6 0.17
Table 12: States which showing 1-5percent labour
transition rate between 2004-05 to 2009-10
34

Case Study
Structural Transformation in
India:
An Econometric Investigation
by
Deepak Kumar Behera
and
Mitali Tiwari
(2015)
35

• Authors calculated trends in employment, magnitude
of structural transformation and the statistical
determinants of this change, which gives interesting
picture about the pattern labour migration in Indian
economy.
• For this purpose authors used and compiled the data from
NSSO, NAS, Agricultural census reports, National
Account Statistics reports.
• Authors taken the data since from 1983 to 2011-12.
• Used the regression technique to calculate rate of
structural transformation taking liberalisation as dummy.
36

• RST is estimated 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
39

• 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.
• Occupational transformation from agriculture to non-
agriculture has marginally increased, while from
agriculture to un organised non-agriculture has
remarkably improved
40

Table 13: Rate of structural transformation in India
Rate of Structural Transformation in India
Sector 1973-74 to
1990-91
1991-92 to
2009-10
1973-74 to
2009-10
Output Transformation Rate
Agricultural output to
total non-agricultural
output
0.560 0.863 0.708
Employment Transformation Rate
Agricultural work
move to non-
agricultural work
0.570 0.586 0.578
Agricultural work
move to unorganised
non-agricultural work
0.598 0.705 0.65
Agricultural work
move to organised non-
agricultural work
-0.023 -0.108 -0.064
Total Unorganised
sector work to
organised work
-0.026 -0.114 -0.069
41

Effects of employment transformation from
agriculture to non-agriculture sector in India
Where,
STR = Structural Transformation i.e. share of non-agricultural
employment to total Employment.
UP = Urbanisation i.e. share of urban population to total population
Y = Share of Non-agricultural sector GDP i.e. non-agricultural GDP to
total GDP
GCF= Share of gross capital formation in non-agricultural sector, i.e.
non-agricultural total investment to total investment
K/L = Share of capital labour ratio in non-agricultural sector
42

Contd…
UE = Share of un organised sector employment in non-agricultural
sector, i.e. Un organised sector employment in non-agricultural sector to
total employment
RW = Rural-Urban real wage differential, i.e. Difference between real
wages in Casual workers between rural and urban areas at 1999-00 prices.
HC = Human capital i.e. literacy rate
L91 = Liberalisation dummy
NA = Non-agricultural sector
AE = employment in agricultural sector
NAE = employment in non-agricultural sector
43

Dependent Variable STR
Independent variable name Coefficient ‘t’ statistics
Constant 0.183* 5.86
UP -0.072* -2.16
YNA 0.042* 2.54
GCFNA 0.027* 4.44
K/LNA -0.032* -5.41
UENA 0.641* 19.69
RW 0.001* 2.40
HC 0.047* 2.04
L1991 0.0001* 1.96
0.77
Durbin- Watson Test 1.65
Table 14:Effects of employment transformation from
agriculture to non agriculture sector in India
46 * At 5% significant level

Drawbacks of Lewis Dual sector model
• Lewis model neglects the importance of labour absorption
in agriculture
• Assumption of adequate labour-absorptive capacity of the
modern Industrial sector
• The Assumption of Constant Real Wage Rate in the
Modern Sector
• It neglects the labour saving nature of technological
progress
• Lewis Model Ignores the Problem of Aggregate Demand
47

Conclusion
• It is evident from the various reports that labour
transition is happening from agriculture to other sectors
in India
• Land holding per person is decreasing over the years
• Wage rates in agricultural sector are not fixed and lower
than that of capital sector
• Productivity of agriculture is increasing over the years
even though there is shift in labour force.
Based on above points we can conclude that Lewis dual
sector model is applicable to Indian situation.
48

Conclusion
48
0
20
40
60
80
100
120
140
160
180
200
SE RE CL SE RE CL SE RE CL SE RE CL
1999-2000 2004-05 2009-10 2011-12
Absolute volume of employment( in million)
Agri Mnfg Non- Mnfg Service
Employment(inmillion)
Years

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