Economic analysis and policy implications of farm and off-farm employment : a case study in the Tigray region of Northern Ethiopia

The central item of this research is the impact of off-farm employment and income on farm households and agricultural production. The interaction between farm and non-farm activities, the adjustment of labor demand and supply, the performance of the labor market, and wage determination are analysed using a farm household model with liquidity constraints. The analysis provides a new insight into the role of off-farm income in risky and less dynamic agriculture (as opposed to dynamic and less risky agriculture).The study shows that off-farm income can be complementary to farm income if farm households are constrained in their borrowing. Imposing liquidity constraints into the standard farm household model proves this theoretically. This is tested empirically using farm household survey data collected from Tigray, Northern Ethiopia. Farm households with more diversified sources of income have a higher agricultural productivity. Expenditure on farm input is dependent not only on agricultural production, but also on off-farm income because of capital market imperfections (borrowing constraints). Farmers involved in better paying off-farm activities such as masonry, carpentry and trading are in a better position to hire farm labor.The wage rates for off-farm work vary across agricultural seasons and skill requirements. Hence, wage rates respond to forces of demand and supply. Increased expenditure on variable farm inputs is found to increase the demand for and supply of farm labor. The farm households have an upward sloping off-farm labor supply, but the supply of off-farm labor is wage inelastic. Due to entry barriers, relatively wealthy farm households dominate the most lucrative rural non-farm activities such as masonry, carpentry and petty trade.Although the study focuses on Northern Ethiopia, most conclusions can have a wider application in the other parts of the country and in many of the Sub-Saharan African countries where agriculture is not dynamic and the capital market is highly imperfect.