DETERMINANTS OF FARM HOUSEHOLDS LABOR SUPPLY TO OFF FARM ACTIVITIES IN RURAL ETHIOPIA

Prepared by: Gebrelibanos Hadush

Submitted to: Copenhagen University, faculty of social Sciences

Department of Economics

Arbaminch, Ethiopia

I. INTRODUCTION 1.1 Background of the study

The Ethiopian economy is dominantly agrarian economy. The rural sector is the source of livelihood for 83 % of the population. Despite many efforts made and time has gone, the sector is characterized by subsistence farming with fragmented and degraded land. It is mainly rain fed and backward. Average productivity of land is 12.57quintal/hectare in 2007/08, which is among the lowest one (CSA, 2008). Employment in the rural sector is characterized by seasonality. There are peak seasons where labour becomes scarce and slack periods where labour become idle. Even though the potential of off- farm activities has not yet realized, farm households participate in off-farm activities especially during slack periods. The types of offfarm activities in which farm households participate were generally categorized in to wage employment and self employment (Tasew, 2000). Off-farm wage employment activities include paid development works, manual non-farm works such as carpentry and masonry. Off-farm self employment include petty trade, transportation by pack animals, selling of wood and charcoal, stone mining and the like. Farm households in Ethiopia have continued to engage in off-farm activities. Therefore the participation and off-farm labour supply decisions of farm families should be studied to understand the dynamics of the determinants of off-farm labour supply.

1.2 statement of the problem

Labor market participation is becoming the major alternative source of income to many land less and small farm households because unprecedented population growth leaves many youths land less. In spite of the high potential of the non-farm sector in generating employment much emphasis has not yet given. The linkage between farm and off-farm activities must be adequately exploited. Thus as a long time strategy, non-farm avenues of employment and earnings for the rural households are must. However there is little research effort to understand the labour supply of farmers to off farm activities in Ethiopia. Therefore this paper attempts to address this problem with particular emphasis on the effect of human capital on the off-farm labour supply of farmers in Ethiopia.

1.3 Objectives of the study

The main objective of this study is to examine the off-farm labour supply behaviour of farm households in Ethiopia by identifying the factors that determine off-farm labour participation and examining the impact of human capital variables on the off-farm wage rate of members of farm households.

1.4 Data and Methodology

The data source for this study is a secondary data taken from the Ethiopian Rural Household Survey conducted by department of economics of Addis Ababa University in collaboration with USAID. It was undertaken in 18 peasant associations in four regional states.

The theoretical model used in this study is based on Skousias (1994). The model assumes the non separability that arises due to the imperfect substitutability of the various labour inputs in the production process. It also assumed that there is no disutility associated with working off the farm and that there are no binding constraints in off farm employment or from disutility with working off the family farm.

The model is based on the following assumptions:

Farm households are assumed to allocate each of their members time endowment (T) among four activities. Leisure (Li), household production (Ni), market works (Mi), and farm work (Fi); where subscript i index males (m) and females (f).

The household produce commodity Z assumed to be perfect substitute with the composite agricultural commodities that is either produced by the household or purchased by the household. The production function for the composite agricultural commodity produced by the household is specified as

(Fm, Ff, Hm, Hf; A) where is concave function.

Households are assumed to maximize utility

Max U(C, Lm, Lf; B). (1)

Where C is total household consumption,

Lm is leisure time for male members, Lf leisure hours for female

members; B is vector of individual and household characteristics influencing preferences An individual is willing to participate in off farm work if his/her reservation wage (Wri) is less that the off farm wage (Wi) net of commuting and expected transaction costs. Accordingly the reservation and off farm wage equations can be specified as:

Wr i = XlrBir+ eir W i = XliBi+ ei

Where

..(2)

(3) i= female, male

Xlr and Xli represent a vector of explanatory variables (see table1 in the appendix to the list of the Bir and Bi are estimated coefficients, and eir and ei are the random disturbance

explanatory variables), terms.

The decision of male and female members of a farm household whether or not to participate in the off farm labour market is modelled as a binary probit model which takes in to account the simultaneity of both participations decisions.

{ P(Di=1)=P(Wi > Wri) = P(Wi> XlrBir+ eir )

Where: Wi is the market wage rate and Wri is the reservation wage

. (4)

Therefore the probability whether to participate in off farm activities depend on the reservation wage ( Wri) relative to the market wage rate net of commuting costs (Wi).

II. RESULTS AND DISCUSSION

The result of the bivariate probit estimation of the off -farm participation decision of farm households is presented in table 2. The presence of heterosckedacticity is detected by Breusch Pagan test by calculating the robust standard error for the probit model.

The log likelihood ratio statistic was significant at 1% level suggesting that the independent variables taken together influence participation decision. The correlation between the errors (rho) is significant which implies the decisions of both members of farm households are not independent.

The effect of age and age square on participation decision is statistically significant only for male members (at 10% level). For female members both are not statistically significant. Experience increases farm productivity and hence reservation wage. Level of education has no significant effect on the decision of farm households to participate in off farm activities. The possible justification for this is the nature of off farm activities in the country- basically they are traditional and manual works. The result also shows that training on handicraft skills has a significant positive effect on off farm participation of the male members and is insignificant for that of female members.

The influence of family characteristics is also analyzed. The positive coefficient of sex shows that male members in male headed households have a greater probability of working off arm than female headed households. Female members are less likely to participate in off farm activities. The number of dependents in the family is negatively is negatively related to the participation decision of both members of family. But the effect is found to statistically significant. The financial condition of the family members has also an impact on the decision of farm households. As per the result of the analysis, credit and transfer income have a positive effect to off farm activities. The size of cultivated land is statistically different from zero. It increases the reservation wage of both male and female members of the household. This might also indicate that farm households participate in off farm activities due to push factors i.e. because of shortage of land to support their livelihood. The effect of other explanatory variables is indicated in table 2.

III. CONCLUSIONS AND POLICY RECOMMENDATIONS

This study has shown the importance of the off farm sector in to the rural people. A considerable size of farm households is engaged in off farm activities to supplement their limited agricultural income. From the results of the data analysis the following points are worth mentioning. Investment in education in rural areas has a significant contribution for the improvement of the economic status of the rural women. Furthermore health condition of the family is obviously an important factor in that it affects the time allocation decision of the family. A rise in the females wage rate increases the off farm labour supply of members of farm households Even though trainings on nonfarm activities have not been given due attention their importance in the off farm work decisions of farm household are supported by the analysis Financial constraints importantly influence the participation decision of farm households. Thus the availability of financial sources will increase the rural people participation Farm household characteristics such as small farm size force them to look for other source of income.

Therefore policies that aim to increase the off farm labour supply should consider the above factors and due attention should be given. However further research is required to analyse the behaviour of off farm labour supply of rural households that take into consideration both the supply and demand side of the labour market in the rural sector of the country.

REFERENCES
Baltagi, B. H. (2008). Econometrics, 4th ed. Berlin: Springer Central Statistical Agency (2008). National Statistics (Abstract). Addis Ababa, Ethiopia Maddala, S. (1983). Limited- Dependent and Qualitative Variable in Econometrics. Cambridge: Cambridge University press. Skoufias, E. (1994).Using Shadow Wages to Estimate Labour Supply of Agricultural Households. American Journal of Agricultural Economics 76: 215-227 Woldehanna,T.(2000). Economic Analysis and Policy Implications of Farm and Off farm Employment, A case Study in Tigray region of Ethiopia, Wageningen Wooldridge, J.M. (2000). Introductory Econometrics (2nd ed). Thomson learning

Appendix Table 1. Description of explanatory variables Used

Variable age agesq Sex drewr dprimar dsecon avscol dchild dhealth numdep dhatrain nadrft transfer land farmexp output cred dist numoxen mahrs* fehours Description Age of the household head Age square of the household head Sex of the head =1 if the head can read & write =1 if the head is primary =1 if the head is secondary Average school of the family =1 if a child is present =1 if there is disability in the family Number of dependents =1 if any training on handicrafts Number of draft animals Amount of transfer income Size of cultivated land Farming experience of the head Crop output of the farm household Amount of credit Distance from the nearest market Number of oxen Male members off farm labour supply Female labour supply

*indicates that it is taken only for off farm participants Note: mahrs= total off farm work of male members (in hours), fehours= total off farm work of female members

Table 2. Determinants of off farm work participation (including only average school of the household members)
Explanatory variables Coef. Age Agesq Sex Drewr Dprimar Dsecon Avscol Dchild Nadrft Dhealth Dhatrain Numdep Dist Lntsfer Lnland Lncredt _ cons Wald test of rho=0 0.0322 -0.0003 0.5692 0.0553 -0.0577 -0.0671 0.0348 0.1764 0.0611 -0.1714 0.3985 -0.0682 0.0625 0.0439 -0.0903 0.0390 -3.079 P>Z 0.069 0.058 0.000 0.620 0.612 0.775 0.162 0.169 0.402 0.059 0.051 0.450 0.000 0.032 0.063 0.013 0.000 Male Marginal effects* 0.0071 -0.0001 0.1044 0.0120 -0.0124 -0.0117 0.0073 0.0379 0.0135 -0.0375 0.1073 -0.0157 0.0137 0.0097 -0.0197 0.0085 Female Coef. 0.0122 -0.0002 -0.1584 -0.1197 -0.0092 -0.3092 -0.0029 0.2217 0.1238 -0.0350 0.1667 -0.1034 0.0160 0.0318 -0.1109 0.0048 -0.6671

P>Z 0.380 0.240 0.078 0.229 0.925 0.192 0.897 0.048 0.057 0.651 0.378 0.186 0.177 0.073 0.009 0.739 0.094

Marginal effects* 0.0044 -0.0001 -0.0615 -0.0439 -0.0036 -0.1086 -0.0013 0.0829 0.0465 -0.0142 0.0637 -0.0394 0.0058 0.0119 -0.0420 0.0017

Chi2 (1) =12.3108

Prob > Chi2 = 0.0005

Wald Chi2 (64) = 466.03 Prob > Chi2 = 0.0000 (*) for the dummy variables the marginal effect is the discrete change of dummy variable from 0 to 1 Z and P>Z are the test of the underlying coefficient being zero.