This paper provides evidence on the impacts of agricultural
productivity on employment growth and structural transformation
of non-farm activities. To guide the empirical
work, this paper develops a general equilibrium model that
emphasizes distinctions among non-farm activities in terms
of tradable-non-tradable and the formal-informal characteristics.
The model shows that when a significant portion
of village income is spent on town/urban goods, restricting
empirical analysis to the village sample leads to underestimation
of agriculture’s role in employment growth and
transformation of non-farm activities. Using rainfall as an
instrument for agricultural productivity, empirical analysis
finds a significant positive effect of agricultural productivity
growth on growth of informal (small-scale) manufacturing
and skilled services employment, mainly in education and
health services. For formal employment, the effect of agricultural
productivity growth on employment is found to be
largest in the samples that include urban areas and rural towns
compared with rural areas alone. Agricultural productivity
growth is found to induce structural transformation within
the services sector with employment in formal/skilled services
growing at a faster pace than that of low skilled services.