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Journal Article•DOI•

Off-Farm Labor Supply and Correlated Shocks: New Theoretical Insights and Evidence from Malawi

Ralitza Dimova1, Shubhashis Gangopadhyay2, Shubhashis Gangopadhyay3, Katharina Michaelowa4, Anke Weber4 •
Center for Global Development1, Shiv Nadar University2, University of Gothenburg3, University of Zurich4
19 Jun 2015-Economic Development and Cultural Change (University of Chicago PressChicago, IL)-Vol. 63, Iss: 2, pp 361-391
TL;DR: In this paper, the authors study occupational choice in uncertain rural environments, with a focus on its ex ante and ex post (after a shock) consequences for farmers belonging to different portions of the asset distribution.
Abstract: We offer new conceptual insights into the understanding of occupational choice in uncertain rural environments, with a focus on its ex ante (before a shock) and ex post (after a shock) consequences for farmers belonging to different portions of the asset distribution. We model theoretically the choice between relatively safe subsistence farming, higher return but higher risk cash crop activities, and off-farm labor—conditional on preexisting asset allocation—and look at the general equilibrium labor market implications of correlated shocks. Our results, backed by evidence from Malawi, challenge some stylized perceptions in the literature on consumption smoothing via off-farm labor supply.

Summary (3 min read)

Jump to: [Introduction] – [II. The Ganyu Market: Theoretical Framework and Hypotheses] – [A. Production of Staple Crop] – [B. Production of Commercial Crop] – [C. The Aggregated Economy] – [IV. Empirical Specification] – [V. Econometric Estimation Strategy and Empirical Results] and [VI. Concluding Remarks]

Introduction

  • The main focus of this literature is on the choice between safer, although low return ðsubsistenceÞ, cropping activities and riskier, although higher return, livestock and cash crop production.
  • One of the most interesting and controversial phenomena in Malawi, consistent with the existence of a dualistic agricultural sector, is ganyu—low-skill off-farm labor, traditionally described as either a form of exploitation of the poor by the rich ðBryceson 2006Þ or a low-risk and low-return diversification strategy of poor subsistence farmers, which eventually drives them further into poverty ðWhiteside 2000Þ.

II. The Ganyu Market: Theoretical Framework and Hypotheses

  • In period 1 the farmer has to prepare the field, and in period 2 the farmer realizes the value from cultivation.
  • While the commercial crop cannot be consumed directly, it can be sold in the market, generating purchasing power for the farmer who can then buy subsistence goods from the market.
  • The other important element in their model is the timing of the realization of the risk.
  • While the uncertainty regarding the commercial crop is not resolved in period 1, when farmers decide on the period 1 investment in land, the uncertainty is resolved at the beginning of period 2, or before the production of the commercial crop happens.
  • In other words, once the uncertainty is resolved, the farmer has a choice of continuing with production or abandoning it and offering to be hired out in the labor market ðbecoming a ganyu laborerÞ rather than working on her own farm.

A. Production of Staple Crop

  • There are two periods in the production process.
  • Family labor can work on the farm or hire itself out at the market wage.
  • The profit, or in their case the rent from land, is the net value of the staple crop—revenue minus the labor cost.
  • For simplicity, the authors will assume that the farmer has enough liquidity to pay for hired labor in period 1.
  • Second, since the authors are calculating the net income in period 2, the family labor component always gets “paid” ði.e., is subtracted as other wage-related costÞ.

B. Production of Commercial Crop

  • There are two major differences between the staple crop and the commercial crop.
  • First, the commercial crop technology is more sophisticated than the staple crop technology.
  • More specifically, for a given plot of land, the greater the intensity of labor use on the land in period 1, the greater the productivity in period 2.
  • What this implies is that on receiving the signal about the low state, the farmers have to abandon their decision to produce the commercial crop.
  • She can earnw2F by using her family labor in the ganyu market.

C. The Aggregated Economy

  • Any region will have a distribution of farmers distinguished from each other by the amount of land they hold.
  • Given the productivity of land in the region, the prices, the wages, and the technology, farmers make their decisions.
  • Similarly, from equation ð12Þ, the authors can get a value of T for the commercial farmers such that all farmers below this amount of landholding will supply labor in the first-period labor market.
  • Thus, all farmers can successfully predict the wage once they observe the signal, and this prediction will be self-fulfilling in equilibrium.
  • In good states of nature ðno negative shocksÞ, ganyu will be supplied primarily by poor farmers ðsimply because they need less of their family labor on their own landÞ, whereas large farmers will demand ganyu.

IV. Empirical Specification

  • To recapitulate, the authors distinguish between hypotheses related to ðAÞ times of shock and ðBÞ normal times, that is, once the event of negative shocks is controlled for: 2 Agricultural but “urban” households constitute 6.3% of the households in their sample.
  • To test these hypotheses, the authors perform the empirical analysis first for the full sample, focusing on the characteristics of ganyu in general and on whether ganyu is primarily supplied by small farmers ðhypothesis BÞ, and then separately for small and large farmers ðhypotheses AÞ.
  • Apart from these main variables capturing the central predictions of their theoretical model, the authors consider a number of controls, which mainly reflect the farmer’s agricultural productivity, wealth characteristics, and geographic characteristics.
  • Since the human capital characteristics of household members are typically highly correlated and the measures for the household head are less likely to be endogenous ðRizov and Swinnen 2004Þ, the authors give preference to the former and define their educational indicator as the years of education and the experience indicator as the age of the household head.
  • In addition, the authors include dummy variables for the most important ethnic groups, the Chewa, mainly in central Malawi, and the Lomthey and Yao in the south ðsee, e.g., CIA 2012; Malawi Government 2014Þ.

V. Econometric Estimation Strategy and Empirical Results

  • As the number of days of ganyu, supplied by the household, cannot be smaller than zero, their dependent variable is censored.
  • To confirm that this is the case empirically, the authors perform likelihood ratio tests to discriminate between the two options.
  • Instead, the authors present the marginal effects with respect to the expected number of days of ganyu supply, that is, for any explanatory variable xj with coefficient bj ðWooldridge 2002, 523Þ: yEðganyu daysjxÞ yxj 5 F xb j bj 5 Prðganyu days > 0jxÞbj: Before they present the results, a few additional estimation problems need to be considered.
  • First, their data are drawn from a stratified random sample, so that observations within strata may not be fully independent.
  • The authors now turn to the ðkey to their analysisÞ comparison across different land sizes to examine whether they find the predicted differences between small and large farmers for the correlated shocks.

VI. Concluding Remarks

  • The occupational portfolio choice of small farmers in uncertainty ridden rural environments is among the most interesting and high profile areas of research and policy debate in development economics.
  • By contrast, the literature on consumption smoothing via off-farm labor supply has focused on the ability of the market to absorb excess labor in the event of idiosyncratic production shocks, as well as on distributional issues linked to asset-based entry barriers for poor farmers in this market.
  • This has left out of focus the intriguing case of labor market dynamics in the face of correlated shocks, as well as the interesting from a policy point of view situation of poverty exacerbation even when obvious entry barriers to factor markets are not present.
  • The authors conceptual results, backed by evidence from Malawi, provide at least some grounds for rethinking policy advice.
  • In such conditions, direct intervention as in the case of the National Rural Employment Guarantee Act in India could perhaps be a more viable policy agenda.

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ZurichOpenRepositoryand
Archive
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Strickhofstrasse39
CH-8057Zurich
www.zora.uzh.ch
Year:2015
O-farmlaborsupplyandcorrelatedshocks:Newtheoreticalinsightsand
evidencefromMalawi
Dimova,Ralitza;Gangopadhyay,Shubhashis;Michaelowa,Katharina;Weber,Anke
Abstract:Weoernewconceptualinsightsintotheunderstandingofoccupationalchoiceinuncertain
ruralenvironments,withafocusonitsexante(beforeashock)andexpost(afterashock)consequences
forfarmersbelongingtodierentportionsoftheassetdistribution.Wemodeltheoreticallythechoice
betweenrelativelysafesubsistencefarming,higherreturnbuthigherriskcashcropactivities,ando-
farmlabor—conditionalonpreexistingassetallocation—andlookatthegeneralequilibriumlabormarket
implicationsofcorrelatedshocks.Ourresults,backedbyevidencefromMalawi,challengesomestylized
perceptionsintheliteratureonconsumptionsmoothingviao-farmlaborsupply.
DOI:https://doi.org/10.1086/679193
PostedattheZurichOpenRepositoryandArchive,UniversityofZurich
ZORAURL:https://doi.org/10.5167/uzh-102875
JournalArticle
PublishedVersion
Originallypublishedat:
Dimova,Ralitza; Gangopadhyay,Shubhashis; Michaelowa,Katharina; Weber,Anke(2015).O-farm
labor supplyand correlated shocks:New theoreticalinsights andevidence fromMalawi.Economic
DevelopmentandCulturalChange,63(2):361-391.
DOI:https://doi.org/10.1086/679193
Off-Farm Labor Supply and Correlated Shocks:
New Theoretical Insights and Evidence from Malawi
ralitza dimova
University of Manchester and IZA, Bonn
shubhashis gangopadhyay
India Development Foundation, Shiv Nadar University, and University
of Gothenburg
katharina michaelowa
Center for Comparative and International Studies ðCISÞ, University of Zurich
anke weber
Center for Comparative and International Studies ðCISÞ, University of Zurich,
and European Commission—Joint Research Centre, Italy
I. Introduction
A large part of the rural landscape of developing countries is dominated by
subsistence farmers, operating on small or marginal plots of land. In the absence
of insurance markets, they take recourse to a number of coping strategies to
protect themselves from various risks. Some engage in specialization that involves
adoptionof production techniques that are resistant to pests, droughts, and other
environmental risk factors. For instance, pearl millet, an extremely sturdy cereal
grown in sub-Saharan Africa, is known for adapting well to extreme evapo-
transpiration, poor sandy soils, and erratic rains. Others resort to consumption
smoothing via diversification, some of which involves combining farm and off-
farm activities within the same household.
The tendency of consumption-smoothing choices to either lift or further
entrap small farmers into poverty has long intrigued economists, and prolific
sets of literature have developed in several different analytical directions. On
the one hand, stylized poverty trap models have focused on the tendency of
asset-poor and hence risk-averse households residing close to the poverty
We thank Sumon Bhaumik, Sebastian Fehler, and seminar participants at Rutgers University and the
University of Manchester for helpful comments. Contact the corresponding author, Ralitza Dimova,
at Ralitza.Dimova@manchester.ac.uk.
Electronically published November 26, 2014
© 2015 by The University of Chicago. All rights reserved. 0013-0079/2015/6302-0005$10.00
threshold to opt for low-risk, low-return portfolios that presumably lower the
risk of hunger but paradoxically push them down a spiral of even further
destitution ðDercon 1998, 2005; Carter and Barrett 2006; Barrett, Carter, and
Ikegami 2008Þ. The main focus of this literature is on the choice between safer,
although low return ðsubsistenceÞ, cropping activities and riskier, although
higher return, livestock and cash crop production. On the other hand, portfolio
diversification into nonfarm ðe.g., off-farm laborÞ sources of income is typically
seen as a strategy that stochastically dominates those relying on own-farm
income alone ðBarrett, Bezuneh, and Aboud 2001Þ.
Indeed, the relatively more scarce literature on consumption smoothing via
nonfarm employment agrees that the off-farm labor supply in poor rural set-
tings tends to increase in the event of a shock, thus potentially providing a vi-
able insurance in uncertain environments ðKochar 1999; Rose 2001; Cam-
eron and Worswick 2003Þ. While the central question here is whether—on
average—a well-functioning rural market can ser ve as a poverty-alleviating
escape option for farmers struck by idiosyncratic shocks, some of the broader
literature on off-farm ðand in particular nonagriculturalÞ labor voices a con-
cern over distributional issues and asks the question whether labor market
barriers may preclude poorer farmers from effectively smoothing their con-
sumption in a risky environment ðLeones and Feldman 1998; van den Berg
and Ruben 2001Þ. The underlying policy implication is that removal of bar-
riers to entry in the off-farm market should help with assuring frictionless con-
sumption smoothing in rural environments fraught with uncertainty.
But is even a barrier-free factor market a panacea, and are those endowed
with better ex ante control over resources always “the winners”? To the best of
our knowledge, while the broader literature on off-farm labor considers dis-
tributional issues primarily on account of barriers to entr y in the labor market,
studies looking at consumption smoothing via off-farm labor supply focus ex-
clusively on the effect of idiosyncratic shocks, possibly on account of the rea-
sonable ðand evidence backedÞ assumption that correlated shocks make per-
fect insurance impossible. This leaves out of focus the more intriguing case of
correlated shocks that affect both poor and rich farmers simultaneously and its
interesting general equilibrium dynamics, alongside situations in which obvi-
ous entry barriers to the off-farm labor market may not be present.
We contribute to the literature by first modeling theoretically the ex ante
choices of farmers belonging to different portions of the asset distribution
among relatively risk-free subsistence cropping, riskier although higher return
cash cropping, and off-farm labor supply and consider the differential off-farm
labor supply effect of correlated shocks on both smaller and larger farmers in
a general equilibrium setting. We test some of the central predictions of the
362 ECONOMIC DEVELOPMENT AND CULTURAL CHANGE
model with the use of data from the particularly interesting context of rural
Malawi, characterized by dualistic agricultural structure, including large cash
crop ðmainly tobacco and groundnutÞ producing estates, alongside a vast small-
holder sector, inhabited by predominantly subsistence farmers. Structural re-
forms in the 1990s attempted to dismantle the dualistic structure—aheritageof
active 1970s–1990s government support for the development of the cash crop
estate sector—by encouraging smallholder involvement in the production of
exportable cash crops, like tobacco, groundnuts, and cotton. However, there is
evidence supporting the persistence of the dualistic agricultural system in Ma-
lawi ðHarishima 2008Þ.
One of the most interesting and controversial phenomena in Malawi, con-
sistent with the existence of a dualistic agricultural sector, is ganyu—low-skill
off-farm labor, traditionally described as either a form of exploitation of the
poor by the rich ðBryceson 2006Þ or a low-risk and low-return diversification
strategy of poor subsistence farmers, which eventually drives them further into
poverty ðWhiteside 2000Þ. If ganyu is indeed a poverty-entrapping strategy, we
should see it prevail in times of need and primarily among poor households.
However, data from the Second Integrated Survey of Malawi, collected by the
Malawi government ð2004Þ, indicate that more than half of all rural house-
holds offer ganyu, and ganyu supply is spread across households and seasons.
Furthermore, qualitative research indicates that ganyu may not be a result of
subsistence constraints but may represent an important source of additional
income ðOrr, Mwale, and Saiti-Chitsonga 2009Þ. This indicates that ganyu
may be more complex than a simple survival ðin fact, poverty enhancingÞ
strategy of smallholders, bound by small land size, credit constraints, and labor
and fertilizer shortages ðAlwang and Siegel 1999; Orr 2000; Orr and Mwale
2001; Harrigan 2003Þ. Testing the predictions of our model in the context of
Malawi not only helps us throw fresh light on the controversial phenomenon
of ganyu labor but also leads to more general and apparently counterintui-
tive findings that challenge some stylized perceptions of the broader literature
on portfolio diversification in developing countries.
The rest of the article is organized as follows. The theoretical model is out-
lined in Section II. Section III discusses some relevant characteristics of rural
Malawi and presents some descriptive statistics. Section IV discusses the em-
pirical specification, and Section V presents the econometric estimation strat-
egy and our empirical results. Section VI concludes.
II. The Ganyu Market: Theoretical Framework and Hypotheses
We consider a two-step cultivation process. In period 1 the farmer has to pre-
pare the field, and in period 2 the farmer realizes the value from cultivation.
Dimova et al. 363
When preparing the field in period 1, the farmer has to use labor, and this
labor requirement is determined by the decision taken by the farmer about the
type of crop to produce in period 2 and the amount of land she has. We
distinguish between two types of crops—a ðsafeÞ staple crop, denoted S, and
the more risky commercial crop, denoted M. While the commercial crop
cannot be consumed directly, it can be sold in the market, generating pur-
chasing power for the farmer who can then buy subsistence goods from the
market. Thus, while the staple provides direct subsistence, the commercial crop
provides subsistence through a market exchange of the crop.
The other important element in our model is the timing of the realization
of the risk. While the uncertainty regarding the commercial crop is not re-
solved in period 1, when farmers decide on the period 1 investment in land,
the uncertainty is resolved at the beginning of period 2, or before the pro-
duction of the commercial crop happens. In other words, once the uncertainty
is resolved, the farmer has a choice of continuing with production or aban-
doning it and offering to be hired out in the labor market ðbecoming a ganyu
laborerÞ rather than working on her own farm. In what follows, we examine
ð1Þ the production of the staple crop, ð2Þ the production of the commercial
crop, and ð3Þ ganyu demand and supply in the aggregated economy.
A. Production of Staple Crop
Consider a farmer with T units of land and F units of family labor. There are
two periods in the production process. In the first period, the land has to be
prepared for production of the crop in period 2. Preparing the land uses l
S
units of labor per unit of land. Thus, the total amount of labor used on T
units of land in the first period is L
S
1
5 l
S
T . Given that the land has been pre-
pared, the second-period output of the staple crop S is given by the function
SL
S
2
; T

5 L
S
2

a
T
12a
: ð1Þ
We normalize the price of the staple crop to be 1. If the land has been
prepared in period 1 for the staple crop, then in the second period the farmer has
to choose the optimal amount of labor to maximize the net value of the staple
crop. Thus, the farmer chooses L
S
2
to maximize ðL
S
2
Þ
a
T
12a
2 w
2
L
S
2
, where w
2
is the wage rate in period 2. From the first-order condition, it is easy to show
that the net income from the staple is maximized at
L
S
2
5 T
a
w
2

1= 12aðÞ
: ð2Þ
While the farmer knows what the wage in period 2 is when deciding to use
labor in period 2, this wage is outside her control, and, hence, she takes it as
364 ECONOMIC DEVELOPMENT AND CULTURAL CHANGE
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Cites background from "Off-Farm Labor Supply and Correlate..."

  • ...Workers can adapt to weather anomalies through sectoral reallocation (Kochar 1999; Rose 2001; Dimova et al. 2015; Mathenge and Tschirley 2015), migration (Barrios, Bertinelli, and Strobl 2006; Halliday 2006; Dillon, Mueller, and Salau 2011; Gray and Mueller 2012a,b; Marchiori, Maystadt, and Schumacher 2012; Gray and Bilsborrow 2013; Mueller, Gray, and Kosec 2014; Henderson, Storeygard, and Deichmann 2015), or human capital investment (Graff-Zivin, Hsiang, and Neidell 2015)....

    [...]

  • ...Workers can adapt to weather anomalies through sectoral reallocation (Kochar 1999; Rose 2001; Dimova et al. 2015; Mathenge and Tschirley 2015), migration (Barrios, Bertinelli, and Strobl 2006; Halliday 2006; Dillon, Mueller, and Salau 2011; Gray and Mueller 2012a,b; Marchiori, Maystadt, and…...

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15 Jan 2016-Journal of Development Studies
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19 Aug 2006-Journal of Development Studies
TL;DR: The authors developed an asset-based approach to poverty analysis that makes it possible to distinguish deep-rooted, persistent structural poverty from poverty that passes naturally with time due to systemic growth processes.
Abstract: Longitudinal data on household living standards open the way to a deeper analysis of the nature and extent of poverty. While a number of studies have exploited this type of data to distinguish transitory from more chronic forms of income or expenditure poverty, this paper develops an asset-based approach to poverty analysis that makes it possible to distinguish deep-rooted, persistent structural poverty from poverty that passes naturally with time due to systemic growth processes. Drawing on the economic theory of poverty traps and bifurcated accumulation strategies, this paper briefly discusses some feasible estimation strategies for empirically identifying poverty traps and long-term, persistent structural poverty, as well as relevant extensions of the popular Foster-Greer-Thorbecke class of poverty measures. The paper closes with reflections on how asset-based poverty can be used to underwrite the design of persistent poverty reduction strategies.

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Q1. What are the contributions in "Off-farm labor supply and correlated shocks: new theoretical insights and evidence from malawi" ?

Dimova et al. this paper proposed new conceptual insights into the understanding of occupational choice in uncertain rural environments, with a focus on its ex ante and ex post ( after a shock ) consequences for farmers belonging to different portions of the asset distribution.