Rural Non-Ahricultural Employment in India:The Residual Sector Hypothesis Revisited

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. [Working Paper No. 67]