RURAL NON-AGRICULTURAL EMPLOYMENT IN INDIA - The Residual Sector Hypothesis Revisited

C. S. Murty
Working Paper No. 67 December, 2005
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The literature on Rural Non-Agricultural Employment (RNAE) in India is replete with references as to its nature - whether or not it is residual. Vaidyanathan (1986) advanced the view that for the sector to be termed residual in nature two conditions should be satisfied: (1) the unemployment rate should be positively related to the RNAE and (2) the unemployment rate again should be negatively related to the wage ratio between the non-agricultural and agricultural sectors. These two propositions have become the corner stones of what has come to be termed as the Residual Sector Hypothesis (RSH). While the hypothesis as such seems to be theoretically sound, empirical evidence is rarely, if ever, consistent with the theoretical postulates. The present paper examines whether the propositions find validity in the NSS data at five different points of time with different statistical tools. The conclusion emerging from the statistical exercises is that the second of the two propositions is not always valid. It is argued that the absence of validity of the second proposition may have to do with the fact that the labour market does not function perfectly and therefore, even if the proposition is not valid one cannot dismiss the possibility that the sector is residual in nature. By way of conclusion it is noted that RNAS does perform the safety-net function admirably by absorbing those who could not find employment in agriculture in the service sector and, to a lesser extent, in the manufacturing sector. Insofar as this is true, the sector needs to be promoted. While rural non-agricultural activities of highproductive nature demand attention because they are a root out of poverty, the lowproductive ones count, for they make critical contribution to the livelihoods of the poor and prevent further destitution.