economic structure: employment composition: primary, secondary and tertiary sectors

Economic Structure: Employment Composition (Primary, Secondary & Tertiary Sectors)

Objective

To understand how the mix of employment across the three broad sectors of activity varies with a country’s level of development and how this relates to demographic trends, income distribution and the wider global context.

1. The Three Economic Sectors

• Primary sector: extraction and production of natural resources – agriculture, forestry, fishing, mining.
• Secondary sector: transformation of raw materials into manufactured goods – manufacturing, construction, utilities.
• tertiary sector: provision of services – retail, finance, education, health, tourism, public administration, information & communication.

2. Structural Transformation & Typical Employment Shares

As economies develop they undergo a structural transformation – the re‑allocation of labour from low‑productivity primary activities to higher‑productivity secondary and tertiary activities.

Level of Development	Primary (%)	Secondary (%)	Tertiary (%)	Typical GDP Share (%)
Low‑income (e.g. many Sub‑Saharan African states)	55‑70	15‑25	10‑20	Primary ≈ 30, Secondary ≈ 25, Tertiary ≈ 45
Middle‑income (e.g. Brazil, India, South Africa)	25‑35	30‑40	30‑45	Primary ≈ 15, Secondary ≈ 35, Tertiary ≈ 50
High‑income (e.g. United Kingdom, Japan, United States)	1‑5	15‑25	70‑85	Primary ≈ 2, Secondary ≈ 20, Tertiary ≈ 78

Source: World Bank World Development Indicators (2023); figures are illustrative averages. Individual countries may fall outside these ranges.

Why does the sectoral mix change? – Demographic drivers

Each of the demographic factors listed in the syllabus directly influences the re‑allocation of labour:

• Population growth: Rapid growth expands the labour force, but if growth outpaces job creation in secondary/tertiary activities, a larger share remains in agriculture.
• Urbanisation: Rural‑to‑urban migration concentrates workers where factories and services are located, accelerating the shift from primary to secondary and tertiary employment.
• Age structure: A youthful population supplies abundant low‑skill labour for agriculture and basic manufacturing; an ageing population raises demand for health, education and other services, boosting tertiary employment.
• Migration: Net inflows of skilled migrants can seed new manufacturing or service firms; net outflows of educated workers (brain‑drain) can slow the transition.

3. Income Distribution & Its Two‑Way Relationship with Sectoral Structure

• Gini coefficient: 0 = perfect equality, 1 = maximum inequality.
• Lorenz curve: Plots cumulative income share against cumulative population share; the farther the curve from the line of equality, the higher the inequality.

Worked example (5‑point income distribution)

Household	Income (US$)
A	2
B	3
C	4
D	5
E	16

Step 1 – Order incomes (already ordered).
Step 2 – Compute cumulative income shares:

• Total income = 2 + 3 + 4 + 5 + 16 = 30.
• Cumulative shares: 2/30 = 0.067, (2+3)/30 = 0.167, (2+3+4)/30 = 0.300, (2+3+4+5)/30 = 0.467, 1.0.

Step 3 – Gini formula (simplified for 5 points):

\[ G = 1 - \sum_{i=1}^{n} (X_i + X_{i-1}) (Y_i - Y_{i-1}) \]

where \(X_i\) = cumulative population share (i/n) and \(Y_i\) = cumulative income share.

Using the numbers above gives \(G \approx 0.32\). This relatively high Gini arises because a small “secondary/tertiary”‑type household (E) earns a much larger income – mirroring a situation where a nascent manufacturing sector pays high wages while the majority remain in low‑paid agriculture.

Two‑way relationship:

• When a secondary sector emerges and pays higher wages, income inequality (Gini) rises.
• Conversely, high inequality can limit the pool of skilled labour needed for secondary and tertiary expansion, slowing structural transformation.

4. Drivers of Structural Transformation (Beyond Demography)

1. Technological progress: Mechanisation, irrigation and automation reduce labour needed in agriculture and manufacturing.
2. Capital accumulation: Investment in factories, transport infrastructure and ICT creates new jobs in secondary and later tertiary activities.
3. Changing consumer demand: Rising incomes shift consumption from basic food and clothing to education, health, finance, entertainment and digital services.
4. Urbanisation: Concentrates labour and capital, reinforcing the shift toward manufacturing and services.

5. Economic Implications of the Employment Structure

• Productivity per worker: Primary workers generate the lowest value‑added; secondary workers are more productive; tertiary workers – especially in high‑skill services – have the highest productivity.
• GDP contribution: In advanced economies the tertiary sector contributes the largest share of GDP despite employing a similar proportion of the workforce, reflecting higher value‑added per worker.
• Fiscal revenue: Service‑oriented economies generate a broader tax base (income tax, VAT, corporate tax) that funds public services.
• Export profile: Low‑income countries rely on primary commodities; middle‑income countries diversify into manufactured goods; high‑income countries export high‑value services and technology.

6. Illustrative Calculations – Labour Re‑allocation

Assume a low‑income country with a labour force of 10 million and 60 % employed in agriculture.

\[ \text{Agricultural workers}=10\,\text{million}\times0.60=6\,\text{million} \]

If the country progresses to a middle‑income structure where only 30 % work in agriculture, the new figure is:

\[ \text{Agricultural workers}=10\,\text{million}\times0.30=3\,\text{million} \]

The reduction reflects productivity gains and the re‑allocation of labour to higher‑value secondary and tertiary activities.

7. Global Context – Aid, Debt & Globalisation

• International aid: Often finances agricultural modernisation, health and education – the foundations for later structural change.
• External debt: High debt can crowd out public investment in the infrastructure needed for manufacturing and services, slowing transformation.
• Globalisation:
  • Off‑shoring of manufacturing accelerates the shift from secondary to tertiary activities in high‑income economies.
  • Trade liberalisation opens markets for primary commodities but also exposes low‑income producers to price volatility.
  • Foreign direct investment (FDI) first targets the secondary sector in middle‑income economies, later moving into services such as finance and ICT.

8. Summary Points

• Structural transformation = re‑allocation of labour from primary to secondary and ultimately to tertiary activities as an economy develops.
• Low‑income economies: primary sector dominates employment (55‑70 %); tertiary sector minimal.
• Middle‑income economies: a more balanced mix; manufacturing still important, services growing rapidly.
• High‑income economies: services dominate employment (70‑85 %) and GDP contribution; primary sector negligible.
• Demographic change (population growth, urbanisation, age structure, migration) directly drives the speed and direction of the sectoral shift.
• Income distribution and sectoral structure interact two‑ways: a small, high‑pay secondary sector raises inequality, while high inequality can hinder further transformation.
• Technological progress, capital accumulation, rising consumer demand and urbanisation are the main engines of change.
• International aid, external debt and globalisation can either facilitate or constrain structural transformation.