Abstract
Promotion of low-skilled off-farm rural labor market participation can be an important strategy to improve livelihoods and food security of the poor in developing countries. This paper investigates rural farm households’ participation in low-skilled off-farm labor markets with disaggregate data from a survey of 400 households in Tigray, the northern highlands of Ethiopia. Adopting Heckman’s two stage approach, we examined households’ decisions to participate or not in markets by probit model in the first stage and level of participation by ordinary least squares procedures in the second stage. The results show that households’ decision to enter into a labor market significantly depends on the characteristics of the households such as sex, age of the household heads and labor endowments in the households. Similarly, the level of participation in labor markets measured by the amount of off-farm wage income depends on labor endowments in the households and the place where the households are located. Since cash constrained rural households do not find themselves advantageous to participate in off-farm labor markets, the reduction of cash constraint is the major policy implication of the paper. This holds true in general for all cash constrained rural households in developing countries. Similarly, the empirical results in the paper suggest removal of locational barriers to access labor markets. This helps them to earn off-farm income. It is necessary to eliminate (or at least reduce) obstacles for rural households to enter into a market of off-farm wage earning activities. This holds true in general for all rural households in developing countries. This paper is therefore expected to contribute to frame appropriate policy that promotes participation in low-skilled off-farm rural labor markets in developing countries where many rural households are not only poor but also low-skilled.
Highlights
Labor is one of the most important assets of a rural household
The household cannot get rid of shadow wage rate
As long as the cash constraint is binding (i.e., μ≠0), household shadow wage rate is higher than the market wage rate making the household not beneficial to participate in a labor market
Summary
Labor is one of the most important assets of a rural household. In many cases, it is the only productive asset for land-poor households available for allocation in developing countries. In addition to the studies in this line of inquiry cited above, there are many other studies with emphasis on investigating the entry barriers to off-farm rural labor markets in developing countries, for example, determinants of rural labor market participation in Tanzania (Mduma and Wobst, 2005), determinants of off-farm earning (Abdulai and Delgado, 1999; Escobal, 2001), income diversification and entry barriers in the Tigray region of northern Ethiopia (Woldenhanna and Oskam, 2001), factors determining off-farm activities and income of rural households with focus on education in Mexico (Yunez-Naude and Taylor, 2001), patterns, determinants and impacts of income diversification in rural Nigeria (Babatunde and Qaim, 2009), and so on. This study empirically addresses the problem using a model which is consistent with rural households’ behavior in participating off-farm wage earning activities in developing countries. Theoretical framework and the model As households simultaneously take decisions regarding investment, production, consumption, and labor supply, a household perspective is the most appropriate to investigate factors influencing rural households’ low-skilled off-farm labor market participation. F-L is the amount of time that a household can sell in labor markets
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