Book Description

February 1995 The allocation of labor between agriculture and nonagriculture is a resource adjustment fundamental to development. A basic determinant of intersectoral migration is income differences between sectors. But is there a permanent wedge between sectoral incomes? Labor is the single most important factor in determining national income. As economies grow, agricultural labor declines as a share of total labor and converges to a level of 2 or 3 percent. Off-farm migration facilitates the development of nonagriculture, but historically the process spans decades. Larson and Mundlak argue that the pace of the process is a fundamental outcome of a dynamic equilibrium based on expectations of lifetime earnings and the cost of migration. The authors present an empirical model of the determinants of intersectoral migration. One fundamental determinant is income differences across sectors. As such, migration should stop when income differences reach a certain level. Larson and Mundlak provide a method of measuring the level at which intersectoral migration will cease. While there are credible reasons for a permanent difference to exist between sectoral incomes, the authors find no empirical evidence of a permanent wedge. This paper -- a product of the Commodity Policy and Analysis Unit, International Economics Department -- is part of a larger effort in the department to understand and measure the determinants of economic growth. The study was funded by the Bank's Research Support Budget under the research project Determinants of Agricultural Growth (RPO 679-03). Donald Larson may be contacted at [email protected].