Agriculture, Rural Labour Markets and the Evolution of the Rural Non-farm Economy

The size of the rural non-farm economy depends primarily on agricultural demand. As farm income grows, it generates spillover growth in the rural nonfarm economy, since rising farm income increases rural purchases of nonfarm goods and services. The well-known debates on agricultural growth linkages revolve around how powerful these demand linkages are (Mellor, 1975; Johnston and Kilby, 1975; Bell and Hazell, 1980). Yet agriculture affects the supply of non-farm goods and services as well. Operating primarily through the labour market, these supply-side linkages have been largely overlooked in the growth linkage discussions. This is unfortunate, because a focus on the labour market alters conclusions about the magnitude of farmnon- farm linkages. It also highlights how agriculture affects not only the size but also the composition of the rural non-farm economy. This paper explores the relationship between agricultural growth, the rural labour market, and the size and composition of rural non-farm activity. It begins by reviewing what is known about the rural non-farm economy in developing countries, followed by a review of empirical evidence on the relationship between agriculture, labour markets and the transformation of the rural non-farm economy. The paper then introduces a simple price-endogenous model that projects the non-farm employment, wage and income effects of alternative forms of agricultural growth. The model highlights the labour market interactions that contribute importantly to a shifting composition of rural non-farm activity.