Agricultural productivity and the sectoral reallocation of labor in rural India

Abstract

How do shocks to agricultural productivity affect the allocation of labor across sectors of the economy? To answer this, I use data from rural India to show that exogenous increases in agricultural productivity — caused by abnormally high levels of precipitation — lead to an increase in the labor share of the non-agricultural sector. I further show that the non-tradable sector expands significantly when agricultural output increases. This evidence is consistent with increasing agricultural output causing increased demand for local non-tradables, which in turn increases the non-agricultural labor share.