The dynamics of off-farm employment, farm size, and farm structure

Abstract

Objectives: (1) Preparing panel data sets for both the United States and Israel that contain a rich set of farm attributes, such as size, specialization, and output composition, and farmers’ characteristics such as off-farm employment status, education, and family composition. (2) Developing an empirical framework for the joint analysis of all the endogenous variables of interest in a dynamic setting. (3) Estimating simultaneous equations of the endogenous variables using the panel data sets from both countries. (4) Analyzing, using the empirical results, the possible effects of economic policies and institutional changes on the dynamics of the farm sector. An added objective is analyzing structural changes in farm sectors in additional countries. Background: Farm sectors in developed countries, including the U.S. and Israel, have experienced a sharp decline in their size and importance during the second half of the 20th century. The overall trend is towards fewer and larger farms that rely less on family labor. These structural changes have been a reaction to changes in technology, in government policies, and in market conditions: decreasing terms of trade, increasing alternative opportunities, and urbanization pressures. As these factors continue to change, so does the structure of the agricultural sector. Conclusions: We have shown that all major dimensions of structural changes in agriculture are closely interlinked. These include farm efficiency, farm scale, farm scope (diversification), and off-farm labor. We have also shown that these conclusions hold and perhaps even become stronger whenever dynamic aspects of structural adjustments are explicitly modeled using longitudinal data. While the results vary somewhat in the different applications, several common features are observed for both the U.S. and Israel. First, the trend towards the concentration of farm production in a smaller number of larger farm enterprises is likely to continue. Second, at the micro level, increased farm size is negatively associated with increased off-farm labor, with the causality going both ways. Third, the increase in farm size is mostly achieved by diversifying farm production into additional activities (crops or livestock). All these imply that the farm sector converges towards a bi-modal farm distribution, with some farms becoming commercial while the remaining farm households either exit farming altogether or continue producing but rely heavily on off-farm income. Implications: The primary scientific implication of this project is that one should not analyze a specific farm attribute in isolation. We have shown that controlling for the joint determination of the various farm and household attributes is crucial for obtaining meaningful empirical results. The policy implications are to some extent general but could be different in the two countries. The general implication is that farm policy is an important determinant of structural changes in the farm sector. For the U.S., we have shown the different effects of coupled and decoupled (direct) farm payments on the various farm attributes, and also shown that it is important to take into account the joint farm-household decisions in order to conduct a meaningful policy analysis. Only this kind of analysis explains the indirect effect of direct farm payments on farm production decisions. For Israel, we concluded that farm policy (or lack of farm policy) has contributed to the fast structural changes we observed over the last 25 years. The sharp change of direction in farm policy that started in the early 1980s has accelerated structural changes that could have been smoother otherwise. These accelerated structural changes most likely lead to welfare losses in rural areas.