Welfare Implications of a Reduction in Government Payments: The Role of Fringe Benefits

Abstract

In the past three decades, farm families have relied on government payments and off-farm income to reduce income risk and increase total household income. Studies have shown that, as income effect dominates, government payments tend to reduce off-farm labor of farm operators and spouses. But that may not be true if one accounts for fringe benefits associated with off-farm employment. Additionally, with looming budget deficits and the possibility of a reduction in decoupled government payments, farm families may be facing an altered economic environment. Our study addresses this issue by examining the links between government farm program payments and the ever-important role of fringe benefits in the off farm employment of farm couples. Result from farm-level data actually show that the marginal effect of government payments on hours worked off-farm will decrease in magnitude when accounting for fringe benefits, ceteris paribus. These results support the notion that farm households’ welfare loss stemming from reduced decoupled payments may be overstated when models exclude fringe benefits from the estimation of off-farm labor supply.