The Conundrum of Labor Shortage in a Labor Surplus Economy: An Investigation of Nepal
Nepal continues to be an agrarian economy with agriculture providing primary employment to 64 per cent of the workforce and contributing 32% in the value-added according to the most recent figures available (CBS, 2015). The pressure on agricultural land is also more than its neighboring countries China and India, which are still regarded as surplus labor economies. Per 1000 rural population, 89 hectares of arable land is available for Nepal in 2018 (FAOSTAT) as against 204 hectares in China and 175 hectares in India. While this cursory picture of Nepal indicates a labour surplus agrarian economy in the Lewisian sense(Lewis, 1954), recent literature has consistently referred to labour shortage in agriculture itself (e.g. Maharjan, 2013; Pant, 2013; Sunam & Adhikari, 2016; Tuladhar, Sapkota, & Adhikari, 2014 to mention few) – an apparent conundrum that warrants further analysis.
The paper starts by statistically confirming the presence of surplus labour in Nepal based on the most recent household survey available for the country (Nepal Living Standards Survey 2010/11). Applying standard methods from the literature, marginal productivity of labour is estimated with a Cobb- Douglas production function and compared with the prevalent agricultural wage rate. The exercise yields evidence of substantial surplus labour in Nepal’s agriculture along expected lines despite the recent reports of labour shortage in the sector. In the next part, the paper investigates the role of migration in explaining labour shortage as done in recent literature (Rozelle, Taylor, & Debrauw, 1999; Tuladhar et al., 2014). To this end run a multivariate regression analysis is carried out using an instrumental variable approach. The results indicate that though migration led to reduction in agriculture production this reduction cannot be interpreted as labour shortage thereby rejecting the hypothesis that migration can systematically explain labor shortage in Nepal.
The paper contributes to the literature on Nepal’s economic development in several ways. First, it estimates the extent of surplus-labour in case of Nepal’s agriculture, something that is missing in the existing literature. Second, it questions the accepted understanding of the negative relationship between agricultural output and migration as indication of labour shortage. Instead, it utilizes this relationship as a robustness check for the existence of surplus. Lastly it indicates several possible reasons for the co-existence of labour surplus and shortage in the context of frictional/missing factor markets that characterizes an economy like Nepal. A rigorous analysis of such a causal channel is left for future work.
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