Sri Lanka’s economy has undergone significant structural changes during the past two decades. The manufacturing and services sectors show a considerable growth during this period and these changes in the economy seem to have had a greater influence on domestic agriculture. Sri Lanka’s rural areas have witnessed the co-existence of rising wage rates of domestic agricultural sector workers with relatively high unemployment levels. The real price of agricultural output shows a declining trend while the real wage rate in domestic agriculture shows an increasing trend. This study examines the influence of the expansion effect of non-agricultural sector on the real wages of the domestic agriculture during the post reform period. Engle and Granger methodology is used to determine the relationship between real agricultural wage rates, capital formation in non-agriculture and wage rate of export agriculture. The results indicate the presence of a long-term relationship between wage rate and capital formation in the non-agriculture sector. Increase in labour productivity, suitable farm mechanization and institutional changes related to land and labour would help to mitigate the negative influence of rising wage rates on domestic agriculture.


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