Can Labor Market Imperfections Explain Changes in the Inverse Farm Size—Productivity Relationship? Longitudinal Evidence from Rural India

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To understand whether and how inverse relationship between farm size and productivity changes when labor market performance improves, we use large national farm panel from India covering a quarter-century (1982, 1999, 2008) to show that the inverse relationship weakened significantly over time, despite an increase in the dispersion of farm sizes. A key reason was the substitution of capital for labor in response to non-agricultural labor demand. In addition, family labor was more efficient than hired labor in the 1982–1999 period, but not during the 1999–2008 period. In line with labor market imperfections as a key factor, separability of labor supply and demand decisions cannot be rejected in the second period, except in villages with very low non-agricultural labor demand.