ABSTRACT. Zeng, Tao. Chinese Agricultural Household Farming Efficiency and Off-Farm Labor Supply.

Transcription

1 ABSTRACT Zeng, Tao. Chnese Agrcultural Household Farmng Effcency and Off-Farm Labor Supply. (Under the drecton of professor Barry K. Goodwn) Ths dssertaton deals wth the off-farm labor supply of Chnese agrcultural households. The data used n ths study are from the World Bank s 1995 North and Northeast Chna Lvng Standards Survey. The objectves are two fold. The frst objectve explores the relatonshp between the farm operators off-farm labor supply and the household s farmng effcency, and dentfes the factors affectng the farm operators offfarm labor supply. Alternatve approaches are used to measure farmng effcency. The theoretcal model predcts an nverse relatonshp between farmng effcency and off-farm labor supply. However, the emprcal results show that the crop producton techncal effcency s postvely related to off-farm labor supply and the agrcultural producton techncal effcency exhbts no sgnfcant effect on off-farm labor supply. There appears to be a surplus of labor n the agraran sector n Chna. Restrctons on the movement of labor among regons and n the reallocaton of farmland serve to mantan ths surplus and thus brng about economc neffcences. The second objectve nvestgates the swtchng nature of the operator s off-farm labor supply dependng on the spouse s partcpaton status n off-farm labor markets. An endogenous swtchng regresson model shows that the spouse s partcpaton status s endogenous to the operator s off-farm labor supply decson. The off-farm labor supply

2 behavor of operators wth spouses workng off-farm exhbts some dfferences from that of the operators wth spouses not workng off-farm. The results support that the agrcultural household s a more relevant decson unt for resource allocaton than s ts ndvdual members.

3 Chnese Agrcultural Household Farmng Effcency and Off-Farm Labor Supply by Tao Zeng A dssertaton submtted to the Graduate Faculty of North Carolna State Unversty n partal fulfllment of the requrements for the degree of Doctor of Phlosophy Economcs Ralegh, NC 2005 Approved by: Char of Advsory Commttee

4 BIOGRAPHY Tao Zeng was born n Hunan, Chna n She receved her B.A. of Economcs from Xangtan Unversty n Then, she stayed there n the Master Program of Economcs. She joned the Department of Economcs at North Carolna State Unversty n August 2000 for her doctoral study. She passed her fnal oral examnaton for Ph. D. n Economcs wth mnor n Statstcs n May 2005.

5 ACKNOWLEDGMENTS I would frst lke to thank Dr. Barry K. Goodwn for hs excellent gudance throughout the course of ths study. As charman of my Advsory Commttee, he has generously provded hs tme, nsghts, and encouragement. Ths dssertaton would be mpossble wthout hs help. I am also very grateful to my other commttee members: Dr. Duncan M. Holthausen, Dr. Danel J. Phaneuf, Dr. Leonard A. Stefansk and Dr. Walter N. Thurman, for mprovng ths research through ther constructve suggestons and comments. I would also lke to thank Dr. Holthausen and Dr. Thurman for the advce and nspraton they provded durng my study at N.C.State.

6 TABLE OF CONTENTS Page LIST OF TABLES LIST OF FIGURES v v 1. INTRODUCTION Introducton of the Problem Objectves Theoretcal Framework and Data for Emprcal Analyss Overvew 8 2. RURAL LABOR MARKET IN CHINA Pre-Reform Labor Arrangements Rural Economc Reform Rural Labor Market n Change LITERATURE REVIEW Lterature about the USA Lterature about Chna FARMING EFFICIENCY AND THE DETERMINANTS OF MULTIPLE JOB HOLDING Introducton Theoretcal Model and Its Implcatons Econometrc Methodology Data and Varables Estmaton Results and Dscussons Conclusons THE OFF-FARM LABOR SUPPLY OF MARRIED FARMERS: A SWITCHING REGRESSION MODEL APPROACH Introducton Theoretcal Model Econometrc Model Data and Varables Estmaton Results and Dscussons Conclusons 89 v

7 6. FARM HOUSEHOLD TECHNICAL EFFICIENCY AND OFF-FARM LABOR SUPPLY: A STOCHASTIC FRONTIER APPROACH Introducton Theoretcal Model Econometrc Procedures and Dscusson of Data Estmaton Strategy Emprcal Stochastc Fronter Model Crop Producton Techncal Effcency Agrcultural Producton Techncal Effcency Off-Farm Labor Supply and Techncal Effcency Estmaton Results and Dscusson Crop Producton Techncal Effcency and Off-Farm Labor Agrcultural Producton Techncal Effcency and Off-Farm Conclusons SUMMARY OF RESULTS AND CONDCLUSIONS REFERENCES 155 v

8 LIST OF TABLES Page Table 2-1 Rural Labor Force Dstrbutons Among Economc Actvtes 21 Table 4-1 Off-Farm Employments by Sex 61 Table 4-2 Varable Defntons and Summary Statstcs 62 Table 4-3 Parameter Estmates of 2SLS 64 Table 4-4 Margnal Effects for Selected Varables 65 Table 4-5 Bootstrap Parameter Estmates 66 Table 4-6 Parameter Estmates 67 Table 5-1 Table of M_off by F_off 92 Table 5-2 Defnton of Varables 93 Table 5-3 Summary Statstcs of Varables 94 Table 5-4 Parameter Estmates of the Swtchng Model 95 Table 5-5 Condtonal Labor Supply Elastcty 98 Table 6-1 Defnton and Measurement of Varables 137 Table 6-2(1) Descrpton of the data for TE c and Off-farm Labor Supply 138 Table 6-2(2) Descrpton of the data for TE and Off-farm Labor Supply 139 Table 6-3(1) Intal Estmaton of Crop Producton Techncal Effcency 140 Table 6-3(2) Intal Estmaton of Off-Farm Labor Supply and TE c 141 Table 6-4(1) Bootstrap Estmaton of Crop Producton Techncal Effcency 142 Table 6-4(2) Bootstrap Estmaton of Off-Farm Labor Supply and TE c 143 v

9 Table 6-5(1) Intal Estmaton of Agrcultural Producton Techncal Effcency 144 Table 6-5(2) Intal Estmaton of Off-Farm Labor Supply and TE 145 Table 6-6(1) Bootstrap Estmaton of Agrcultural Producton Techncal Effcency 146 Table 6-6(2) Bootstrap Estmaton of Off-Farm Labor Supply and TE 147 Table 6-7 Returns to Labor (Yuan per Hour) 148 v

10 LIST OF FIGURES Page Fgure 1. Producton Possblty Sets 102 Fgure 2. Dstance Functons 104 Fgure 3. Input (a) and Output (b) Orented Effcency Measures 106 v

11 Chapter 1 Introducton 1.1 Introducton of the Problem The movement of labor away from the agrcultural sector has long been consdered to be an essental feature of economc development, both hstorcally n developed countres and currently n developng ones. The economc development process s usually featured by the release of labor and other productve resources from agrculture. Mgraton of labor out of agrculture may result as permanent movement of labor from one locaton or sector to another. Alternatvely, labor may be reallocated between farm and off-farm sectors through the effects of part-tme or full-tme off-farm employment of farmers. The allocaton of labor among agrcultural and nonagrcultural sectors s an especally mportant feature of market development n transton economes. Snce economc reform began n the late 1970 s, the rural economy n Chna has experenced rapd growth. Chnese rural workers enjoy more freedom to choose ther occupatons and to dvde ther labor among household farmng and non-farm employment. These opportuntes have grown over the last two decades, especally after the 1990s market-orented reforms. Some estmates showed that off-farm rural employment n Chna rose from less than 40 mllon n 1981 to more than 150 mllon farmers n 1995, a growth n off-farm employment of more than 100 mllon farmers (DeBrauw, Huang, Rozelle and etc 2002). In contrast, before the 1970s rural household members had no alternatve to collectvzed farmng. Wth an unfavorable rato of farmland to rural labor of hectares, (compared to for Inda, for the 1

12 U.S., and for the world) and a perceved surplus n the agrcultural labor supply, off-farm employment has become an mportant source of ncome and employment for Chnese rural households. Gles (2002) showed that n Chna, as n other regons of the developng world, access to off-farm labor markets can help rural households reduce vulnerablty to agrcultural producton shocks. In order to modernze successfully, Chna must rely on labor markets to facltate the shft from a largely rural populaton to an urban one. General economc development causes ncreases n off-farm wages and n off-farm employment opportuntes. From the perspectve of agrcultural households, t s ratonal to allocate the resources ncludng labor supply n a way so that the utlty s maxmzed rather than to only rely on agrcultural producton. Accordngly, the off-farm labor supply of farmng households s one of the mportant aspects of resource allocaton n farmng households as well as of structure changes n agrculture. 1.2 Objectves The general objectve of ths research s to examne the labor supply responses of Chnese farm households to changes n economc opportuntes. The frst objectve s to dentfy factors affectng the amount of tme suppled to off-farm employment by farm operators and ther respectve effects. Partcular attenton s gven to the relatonshp of household specfc farmng effcency and the off-farm labor supply of farm operators, snce off-farm labor supply can nduce changes n the structure of agrcultural product supply and factor demand functons. Much prevous research has been focused on the growth of total agrcultural productvty. Some work has amed to nvestgate the effect of mgraton of farmers on the total gran output from a macro perspectve. Lttle research 2

13 has been targeted at household agrcultural productvty and ts relatonshp wth the household s off-farm labor supply. Cook (1999) studed labor allocaton and productvty at the household level; though her analyss s based on a sngle county and s not generalzable to all of Chna. Cook concluded that contemporary Chnese agrculture s characterzed by a surplus labor supply, suggestng that agrcultural output wll not be reduced wth the surplus labor transferred out of agrculture. Rozelle et al. (1999) traced the lnkages among mgraton, remttance, and agrcultural productvty. They found that temporary mgraton depressed yelds, suggestng that there s no exstence of labor surplus at the household level, whch contradcts Cook s results. In ths dssertaton, dfferent approaches are employed to derve household specfc farmng effcency for Chnese agrcultural households. The analyss wll enrch our knowledge to understand the role played by off-farm labor supply n the structural changes n the agrcultural sector. The second objectve s to nvestgate the swtchng nature of the operator s offfarm labor supply dependng on the spouse s partcpaton status n off-farm labor markets. The ntrafamly nterdependence s of mportance because the farm household s a more relevant decson unt for resource allocaton and consumpton than s ts ndvdual members. Even when polcy measures or changes only touch on the labor allocaton decson of certan group of household members drectly (for example, male farmers), the polcy changes would also affect tme allocaton decson of ther spouses and consequently agrcultural resource allocaton n general. Few studes about labor allocaton n rural Chna have taken ths aspect nto account. Analyss of ths theme n ths dssertaton wll provde nformaton that may be mportant for the desgn and 3

14 coordnaton of economc polces that affect the rural regons because t can help to mprove conformty between poltcal goals and measures. 1.3 Theoretcal Framework and Data for Emprcal Analyss The agrcultural household model has been a popular approach to the analyss of off-farm labor supply of agrcultural households. The decson unts are sngle agrcultural households. Household members welfare s assumed to be summarzed n a sngle hybrd, household-utlty functon, whch combnes utlty maxmzaton, analyss of consumpton, producton, and labor supply decsons. Ths dssertaton adopts the agrcultural household model as the bass for theoretcal dscussons. The central part of ths research s the off-farm labor supply of Chnese agrcultural households; accordngly the model presentaton and the dscusson wll be concentrated on the tme allocaton problem. The model structure wll be presented and extended to the problem at ssue n chapter 4 and chapter 5. Chapter 6 follows the same model as chapter 4. The data used n ths study are from the World Bank s North and Northeast Chna Lvng Standards Survey 1. The survey was carred out n the summer of It covered 787 households n 6 countes, 18 townshps and 30 vllages n the northern provnce of Hebe and the northeast provnce of Laonng. The countes and vllages were not selected randomly 2. Each of these countes was the ste of an ntensve 1 Informaton about World Bank s Lvng Standards Survey, see A Gude to Lvng Standard Measurement Study Surveys and Ther Data Sets Informaton about World Bank s North and Northeast Chna Lvng Standard Survey, please see 2 The sample s not a rgorous random sample drawn from a well-defned populaton. Instead t s only a rough approxmaton of rural populaton n Hebe and Laonng provnces n Northeastern Chna. The reason for ths s that part of the motvaton for the survey was to compare the current condtons wth condtons that exsted n Heba and Laonng n the 1930 s. Three countes n Hebe and three countes n Laonng were selected as prmary samplng unts because data had been collected from those sx countes by the Japanese occupaton government n the 1930 s. Wthn each of these sx countes fve 4

15 household level nvestgaton carred out by Japanese nvestgators n Fve vllages n each of the sx countes were selected, one of whch had been fully enumerated n the 1930s. The other four vllages n each county were drawn to be as representatve of a cross-secton as possble. They ncluded one vllage located n the same townshp as the admnstratve captal of the county; one vllage located n the same townshp as the vllage surveyed n the 1930s; and two vllages drawn from a thrd townshp. A total of 130 households were surveyed n each county: ffty from the vllage surveyed n the 1930s and twenty from each of the remanng four vllages. The households were selected based on random samplng usng the most recent vllage regstry. When Japanese General Kodama Gentaro and Goto Shmpe formulated ther colonal polcy to develop ts resources to serve Japan s long-range mperal nterest n the late 19th century, they started ther nterest n Chnese rural condtons. Goto Shmpe beleved that a thorough study of socal and economc nsttutons was necessary before ntroducng major reforms to a tradtonal socety so as to antcpate ther mpact and to mnmze the costs and dffcultes of colonal rule. To shed lght on Chnese socety n order that ts legal and economc system be revamped and a comprehensve plan vllages were selected, for an overall total of 30 vllages (n fact, an admnstratve change n one vllage led to 31 vllages beng selected). In each county a man vllage was selected that was n fact a vllage that had been surveyed n the 1930s. Because of the nterest n these vllages 50 households were selected from each of these sx vllages (one for each of the sx countes). In addton, four other vllages were selected n each county. These other vllages were not drawn randomly but were selected so as to represent varaton wthn the county. Wthn each of these vllages 20 households were selected for ntervews. Thus the ntended sample sze was 780 households, 130 from each county. The selecton of households wthn each vllage was done accordng to standard sample selecton procedures. In each vllage, a lst of all households n the vllage was obtaned from vllage leaders. An nterval was calculated as the number of the households n the vllage dvded by the number of households desred for the sample (50 for man vllages and 20 for other vllages). For the lst of households, a random number was drawn between 1 and the nterval number. Ths was used as a startng pont. The nterval was then added to ths number to get a second number, then the nterval was added to ths second number to get a thrd number, and so on. The set of numbers produced were the numbers used to select the households, n terms of ther order on the lst. 5

16 formulated for Japan to follow wth respect to her Chna polcy, several Japanese research organzatons formulated ther ambtous programs for the economc and poltcal study of manland Chna. In 1934 n Japanese-occuped Manchura (present-day northeast Chna), the Japanese establshed a Provsonal Industral Investgaton Bureau n the Mnstry of Enterprses of the Natonal Affars Yuan of Manchukuo. The Frst Secton of the Bureau was to survey vllages n dfferent countes for a fve-year perod and produce evdence to enable polcy makers to understand rural economc condtons throughout Manchura. The frst survey was conducted n late February 1935, whch resulted n the publcaton of a three-volume study n Aprl Condtons of seventeen vllages of sxteen countes throughout north Manchura for were reported. Another survey commenced n late February 1936 n twenty-one more vllages of twenty-one other countes, manly located n south Manchura (present-day Laonng provnce). Ths survey led to the publcaton n December 1936 of four volumes reportng vllage condtons for Separate county and vllage studes were made agan n 1937 and The 1936 survey ncluded 1,049 households resdng n 21 vllages n 21 countes, wth supplementary nformaton compled for each of these vllages on four to sx outlyng vllages. The vllages were selected to reflect the dversty of geographc and economc condtons n Manchura. Most of the vllages are located n the south of Shenyang (Captal of Laonng provnce), and were typcally located wthn 20 klometers of the county seat. Myers, Benjamn and Brandt have worked wth the data and they beleve 6

17 that the data s of good qualty despte the fact that t was collected by an occupyng power, because the Japanese nvestgators worked wth local vllage offcals and eltes n order to obtan the cooperaton of households n the survey. The North Chna Economc Research offce of the Mantetsu chosabu launched a ten-year research plan wth a budget outlay of 5.5 mllon yen. They proposed a study of land tenure systems n Shandong, Hebe, and Inner Mongola, to be followed wth feld studes of commercal customs and organzatons n Kangsu and Chekang. Laonng Provnce les n the northeastern part of Chna, surrounded by Jln, Inner Mongola and Hebe, and borderng on the Democratc People's Republc of Korea to the east and by the Yalu Rver. Laonng s one of the most mportant heavy ndustry producton bases n Chna. In the course of recent years, townshp enterprses have become an mportant pllar of Laonng's economy. Hebe Provnce les to the north of the lower Yellow Rver and to the west of Boha Sea wth a coastlne about 500 km long. It borders on Laonng, Inner Mongola, Shanx, Henan, and Shandong provnces. Hebe has a long hstory of agrculture, and s one of the mportant areas for producton of gran and cotton n Chna. Anmal husbandry and fsheres are also mportant components of the economy. In both Laonng and Hebe, agrculture remans a domnant source of ncome, but the development of local off-farm employment enables households to cultvate ther allocated land as a basc form of securty whle undertakng more lucratve non agrcultural actvtes to ncrease ther ncome. Therefore, n contrast to some research that has focused on only the poorest areas or the rapdly developng regons, the study of Laonng and Hebe provdes a more representatve rural area. 7

18 The survey provdes detaled nformaton about household characterstcs (e.g. demographc structure, educaton, housng condtons, farm sze) and economc actvtes (e.g. farm management, own non-agrcultural busness, off-farm jobs, household expendtures, gfts, remttances, savngs and loans). The sample ncludes 2183 ndvduals, percent beng male workers. The average per capta ncome n the sample s 3510 Yuan, or about US $442. Farm ncome accounts for nearly half of total household ncome. Nearly three-quarters of farm ncome s from crops and the rest s from sdelne enterprses such as vegetable gardens and greenhouses. More than 45 percent of the populaton worked off-farm, of whch nearly 70 percent were male workers. About 95 percent of ndvduals hold agrcultural regstraton status. Twelve out of thrty one vllages have local rural enterprses, where percent of the populaton resdes. Off-farm actvtes nclude famly-run busness and off-farm wage employment. The occupaton survey part contans detaled nformaton about days and hours worked on farm durng the busy season and non-busy season, and detaled nformaton about months, days and hours worked off-farm n the year of Overvew The dssertaton proceeds n the followng manner. Chapter 2 descrbes brefly the stuaton of the rural labor market and the rural economc reform n Chna, whch serves as prerequste for understandng the emprcal analyss defnton of varables and emprcal results n the followng chapters. Chapter 3 revews the prevous research that has been done about Chnese off-farm labor markets as well as studes about off-farm labor markets n the USA and other developed countres. Chapters 4, 5 and 6 form the heart of the dssertaton, to accomplsh the objectves mentoned n secton 1.2. Chapter 8

19 4 uses bootstrappng technques to obtan a smplfed smultaneous-equaton Tobt estmator for the operators off-farm labor supply. Farmng effcency s represented by usng nstrumental varables. Chapter 5 adopts a swtchng regresson model to nvestgate the swtchng nature of the operator s off-farm labor supply wth regard to the spouse s partcpaton decson n off-farm labor market. Chapter 6 employs stochastc producton fronter estmaton methods to derve household specfc farmng effcency and nvestgate ts relatonshp wth the operator s off-farm labor supply. In concluson, Chapter 7 summarzes the theoretcal dscusson and the emprcal analyss of the research. 9

20 Chapter 2 Rural Labor Market n Chna Ths chapter descrbes the economc reform n rural Chna and the structural changes of the rural labor market, based on offcal statstcs as well as results from some earler research. Secton 2.1 brefly descrbes the general stuaton n the rural labor market before the economc reform. Secton 2.2 gves a pcture of the rural economc reform, whch started n Secton 2.3 marks out the changng rural labor market. Ths presentaton serves as prerequste to understand the emprcal work n chapter 4, chapter 5 and chapter Pre-Reform Labor Arrangements A fundamental characterstc of the Chnese economy under central plannng s the formal segregaton of the agrcultural-centered rural and manufacturng-centered urban economes and labor forces. Under central plannng, startng n 1949, the two sectors were treated as separate enttes, though crtcally lnked to each other. Stll underlyng Chnese labor-market problems and polces today, the segregaton leads to major problems of ncentves, moblty, wage dfferences, and socal polcy between rural and urban sectors. The dvson between state and non-state ownershp sectors; socalsecurty lke medcal coverage and pensons and unemployment nsurance; and related topcs of housng, educaton, and other socal servces dffer tremendously between rural and urban economes. Durng the perod of central plannng, the Chnese government pursued a heavy-ndustry-orented development strategy, whch amed at achevng rapd 10

21 ndustralzaton by extractng agrcultural surplus for captal accumulaton n ndustres and for supportng urban-based subsdes. To enforce ths strategy, agrcultural commodtes were unfedly procured and sold; and the entre populaton s place of resdency and work were desgnated by the People s Communes 1 and Household Regstraton System (for an explanaton, see page 16). Ths development strategy resulted n dstortons n factor markets wth an excessve concentraton of captal n urban areas and of labor n rural areas. The labor force n rural areas was governed under the People s Communes, whch receved producton targets from the plannng authortes and delvered procurements at state-dctated low prces. Ever snce the tragc famne of the Great- Leap-Forward 2 n , natonal polces stressed agrcultural producton and local gran self-suffcency. Rural ndustres were underdeveloped and remaned subsdary to agrculture. Before 1978, Maost polces of egaltaran dstrbuton- eatng from the same bg pot dscouraged ncentves wthn the rural economy. Labor rewards were not related to agrcultural output or the actual work done but rather to tme spent n the felds by workers. Ths polcy offered lttle ncentve for an ndvdual to be effcent or hard workng and encouraged free-rder behavor. There were two sets of problems n the 3 People s Communes were ntally created n 1958 to nsttute a more egaltaran mode of producton as part of the Great Leap Forward. Communes comprsed about 5,000 households on average. All property was jontly owned and ncome was dstrbuted accordng to a work-pont system that undervalued ndvdual contrbuton. Communes possessed governmental, poltcal, and economc functons. Beneath communes n the organzatonal herarchy were producton brgades and producton teams. Wth the agrcultural reforms of the early 1980s the commune system was slowly dsbanded, replaced by townshps n most areas by A utopan campagn started n 1958 and sought to make Chna an advanced ndustral country n the span of several decades by employng mass collectvzaton and mass poltcal moblzaton. The campagn resulted n economc dsaster and a devastatng famne. By the tme the GLF was abandoned n 1960, tens of mllons had ded of starvaton. 11

22 labor market under central plannng: (1) labor ncentve problems due to the organzaton of work wthn communes, and (2) msallocaton of labor between rural and urban sectors, as well as between agrcultural and non-agrcultural sectors wthn rural regons. 2.2 Rural Economc Reform Market-orented development n rural Chna started wth a package of three reforms: the replacement of producton teams wth the Household Responsblty System, offcal ncreases n agrcultural product prces, and the lberalzaton of markets for rural products. These reforms provded the necessary condtons for the boom n rural ndustral development startng n the md-1980s, and were nstrumental for the emergence of labor markets n rural Chna. Economc reform n the countrysde resulted from a reacton from those endurng extremely poor lvng condtons. Between 1976 and 1977, a producton team n Anhu provnce secretly ntated a partal prvatzaton movement. The farmers were so trapped n poverty that they dd not partcularly care f they would be caught and punshed by the government. They dvded ther team s land nto equal-szed small peces and allocated each famly member ther share. Contracts were made between the producton team wth each famly, requrng each famly to pay an amount of gran to the government and the producton team. A famly could retan the rest of ther output. Snce ndvdual households took responsblty for agrcultural producton and ther efforts were drectly rewarded, famly work effort was strongly encouraged. By the end of the year, the producton team s total output more than doubled and the farmers had enough to feed themselves. Many producton teams followed the example the year after and all successfully ncreased ther output and famly ncome. Fnally, the Chnese government 12

23 realzed that t s the way for farmers to get out of poverty and hunger. Based on these spontaneous experments, the Household Responsblty System (HRS) was ntroduced to the whole country n 1978 and was essentally completed n The HRS enabled resource allocaton, producton structure and ncome dstrbuton among famly members to be household decsons, provded that the quotas and leves were met. Meanwhle, the government also started reforms on producton plannng by reducng the number of producton plannng targets or categores. Many of the remanng targets were drected by complementary prces and ncentve schemes. Farmers then not only were nspred to work hard but also had certan ndvdual freedom to seek off-farm employment. Households decded who worked on whch plot of land or whch off-farm actvty accordng to ndvdual members abltes. Ther efforts were drectly rewarded n the form of household ncome. Assumng that a household s an ntegrated decson-makng agent who maxmzes household s rather than ndvduals utlty; the free-rder problem could easly be solved under the HRS. Many studes have shown that the rapd growth of labor productvty n rural Chna s a drect result of these nsttutonal changes (Ln, 1988). The government also substantally rased state procurement prces for agrcultural products. Durng the years , prces for gran procurement were ncreased by 98.1 percent, for ol-bearng crops by 51.8 percent, and for cotton by 56.9 percent (calculated from State Statstcal Bureau 1995: ). The state also rased the bonuses for above quota procurement from 30 percent of the state fxed prce to 50 percent. Durng , the government reduced the number of agrcultural goods under drect state prcng control from 113 to 17. Moreover, the state gradually replaced the old state prcng 13

24 system (the state set the prces of ndustral goods near or above the market prce whle settng prces for agrcultural products below ther market value, whch comparatvely undervalued agrcultural products), wth a two-tered prcng mechansm. The government contnued to set basc procurement prces for essental agrcultural products ncludng grans, vegetable ols, and cotton; however, state offcals also set negotable prces, or prces more accurately reflectng market value, for products sold above fxed quotas. Fnally, the government slowly ncreased the number and type of goods that farmers could sell at local markets at floatng prces ndependent of state control. These prce adjustments njected a large amount of funds nto the rural economy, whch created a demand for ndustral products and suppled funds for captal nvestment, especally non-farm producton. The lberalzaton of rural markets accommodated the sales of nonfarm products and facltated the purchase of nputs for nonagrcultural actvtes. Consequently, by the md-1980s, the economc bass for accelerated growth n rural ndustres was embedded n Chna s rural economy. Input and output markets had emerged; households were conscous of ther alternatve opportuntes; and they had ncentves to quckly allocate resources to nonagrcultural actvtes that would generate hgher returns than those from farmng. There s lttle queston that the margnal productvty of captal and labor n the non-farm sector of the rural economy exceeded the levels n the croppng sector, ndcatng over-allocaton of resources to agrculture (Putterman, 1993). A seres of government regulatons enacted n the 1980s loosened restrctons on labor moblty, catalyzng the rapd expanson of non-farm producton that could absorb labor released by the ncreasngly productve farmng sector. 14

25 In 1983, Document No.1 of the Central Commttee of the Chnese Communst Party released general gudelnes to encourage the emergence of specalzed households 3 and ther effectveness n makng the best use of lmted funds and labor. Sklled workers and craftsman were permtted to leave farmng and engage n a varety of nonagrcultural actvtes, ncludng long dstance transport and the marketng of commodtes. The document also allowed cooperatve ventures, rural-ndustral and commercal households to hre labor. In 1984, the Central Commttee of the Chnese Communst Party and the State Councl ssued the Report on Creatng a New Stuaton n Commune and Brgade-run Enterprses, whch outlned a new development strategy focusng on rural ndustry development. Rural ndustral development was expected to provde nputs for agrculture, to absorb rural labor, and to help rase rural ncomes. In 1985, Document No.1 permtted farmers to seek employment and establsh busness n nearby towns, f they were able to provde ther own food gran and were fnancally able to run a busness. Ths deregulaton offcally allowed labor moblty wthn rural regmes. In addton to the relaxaton of controls on labor moblty, a major reform n agrcultural producton and procurement helped stmulate the fast expanson of rural ndustres. At the begnnng of 1985, after consecutve years of good crop harvests, the 3 In the 1980s, market actvty played a central role n the rural economy. Farmers sold a growng share of ther produce n rural or urban free markets and purchased many of the nputs that had formerly been suppled by the team or brgade. A promnent new nsttuton that thrved n the market envronment was the "specalzed household." Specalzed households operated n the classc pattern of the entrepreneur, buyng or rentng equpment to produce a good or servce that was n short supply locally. Some of the most common specaltes were truckng, chcken rasng, pg rasng, and techncal agrcultural servces, such as rrgaton and pest control. Many of the specalzed households became qute wealthy relatve to the average farmer. 15

26 state announced that t would no longer set any mandatory producton plans n agrculture and that purchasng contracts negotated between the state and farmers were to replace oblgatory procurement quotas. The loosenng of farmng constrants, together wth the ncreased freedom n resource allocaton decsons, enabled farmers to adjust ther productve actvtes n accordance wth proft margns. In 1985, the gran-sown area at the natonal level fell by 4 percent, cotton-sown area fell by 26 percent. In contrast, the number of TVEs (townshp and vllage enterprse) more than doubled n the same year, and ther total labor force ncreased by 36.5 percent, followng a year of strong growth n These dramatc changes n polces and n farmers responses marked the begnnng of sustaned expanson n rural ndustry. Between 1980 and 1993, rural ndustral output value grew at nearly 35 percent per year (ZGTJNJ, 1995). By 1994, nearly 20 mllon non-state rural enterprses employed 113,296,984 peasants (24 percent of all rural labor), produced one half of the natonal ndustral output value, pad one quarter of natonal taxes, and brought n about one thrd of the naton s foregn exchange from exports (The Chna Handbook, 122). The share of ndustral output produced by rural ndustry s a feature unque to Chna s development, when compared to the development experences of other countres 2.3 Rural Labor Market n Change The fundamental changes n the dstrbuton of the labor force have been the man feature of Chna s rural labor market snce the reform. Between 1978 and 2000, the rural labor force grew by 2.6 percent per annum, from to mllon, whle the workers n rural non-agrcultural actvtes ncreased by about 27 percent per annum, from 21.8 to mllon. About 75 percent of the rural labor supply ncrement was 16

27 absorbed n the non-agrcultural sector, where a majorty of the total went to the Townshp and Vllage Enterprses (see Table 2-1) 4. Non-farm employment has been an mportant contrbutor to sustaned ncome growth snce the ntal rural reforms n organzatons and prces. It s worthwhle to quote the succnct apprasal of the 1996 World Development Report (page20-21) Despte the ndustralzaton efforts of the 1950s and 1960s, Chna was very poor and largely rural at the start of ts reform. Agrculture employed 71 percent of the work force and was heavly taxed to support ndustry.because the agrcultural sector had been so heavly repressed, freeng t up had mmedate payoffs. Between 1981 and 1984 agrculture grew n average by 10 percent a year, largely because the shft to famly farmng mproved ncentves. Ths allowed for the reallocaton of surplus agrcultural labor to new rural ndustres, whch generated 100mllon new jobs between 1978 and 1994 and encouraged further reform. Some research has revealed that most of the development has occurred n the coastal provnces whle nland areas stll rely on agrculture and do not enjoy the hgh ncomes of ther more ndustralzed coastal counterparts (Lohmar, Rozelle and Zhao, 2000). Growth n rural ndustry ntally provded off-farm employment opportuntes prmarly for local resdents; the contnung success of rural enterprses has begun to open up local labor and manageral markets, whch stmulated a fast growng rural-to-rural labor movement. Chna has used a household regstraton system for tax collecton and socal control purposes for over 2000 years; but ts current mportance stems from ts formal adopton by the Chnese government n 1958, wth the ssung of Regulatons on Household Regstraton of the PRC. Accordng to the regulaton, Hukou (type of 4 Yang 2003, Chna s Labor Market 17

28 household regstraton status) desgnates a person s legal place of resdence and work at the tme of hs or her brth based as the localty of the mother s regstraton. Hukou s categorzed as agrcultural Hukou and non-agrcultural Hukou. Possesson of the approprate Hukou determnes one s access to varous amentes and socal servces such as health care, schoolng, and untl recently, ratoned or subsdzed food products, whch were provded only to urban resdents. Therefore, although the rural labor force had strong desres to seek employment opportuntes wth better pay n ctes, they had to overcome legal barrers to workng n ctes. Because of the neffcency assocated wth labor msallocaton, the Hukou system has been modfed n recent years to permt more flexble labor reallocaton between rural and urban markets. In 1988, a major polcy reform was ntroduced to permt farmers to work n ctes, provded they could secure ther own staples. Ths regulaton relaxed the controls over rural-urban mgraton and gave rural workers opportuntes to work temporarly n ctes. In contrast, under the old system, a college educaton (not even marrage) was the only legtmate channel to access urban regstraton. In the early 1990s, the end of food ratonng further reduced the costs of lvng for temporary rural mgrants n ctes because they no longer had to brng food wth them from the countrysde. They could purchase food drectly wthout securng ratonng coupons. 1998, the Mnstry of Publc Securty ssued another regulaton loosenng the control of Hukou regstraton those who moved to jon ther parents, spouses and chldren n ctes could also receve urban regstraton. The reform of the Hukou system s stll ncomplete and ts progress vares across provnces and even ctes. In general, local stuatons fall nto one of the three models: (1) 18

29 n over 20,000 small towns, applcants may receve local regstraton f they have a permanent source of lvng and housng n the localty, (2) n many medum-sze ctes, ncludng a few provncal captals, requrements for ganng Hukou status have been sgnfcantly reduced; some just requre a long-term work contract, and (3) n a few mega-ctes such as Bejng and Shangha, obtanng Hukou remans very dffcult for outsders. Even so, Chnese rural people are fully respondng to the relaxaton of longstandng controls over rural-to-urban mgraton. A commonly cted fgure puts the number of rural mgrants resdng n urban areas at 50 mllon n the md 1990 s 5. Due to the long-standng polcy of restrctng mgraton from rural to urban areas, a sgnfcant urban-rural ncome gap developed, provdng rural people a strong ncentve to mgrate to urban areas. The per capta ncome n the urban area was 3.09 tmes that n the rural areas n 1980 and 3.27 n Gven the dstortons n the factor markets before the reforms, the subsequent labor movements from the low productvty agrcultural sector to the hgher productvty non-agrcultural sector became a major source of economc growth n Chna n the post reform perod. Estmates by the World Bank (1997) suggest that labor moblty contrbuted 1.5 percentage ponts to the annual GDP growth rate of 9.4 percent over the perod between 1978 and 1995, whch s 16 percent of the GDP growth of that perod. 4. Yaohu Zhao, Leavng the Countrysde: Rural-to-urban Mgraton Decsons n Chna, AEA Papers and Proceedngs, , May From Natonal Bureau of Statstcs Research Group, A Study on the Urban-Rural Income Gap, Economc Research, 1994, Issue 4,

30 The precedng descrpton shows that there are three forms of off-farm employment for Chnese farmers: (1) TVE employment, (2) prvate and ndvdual sdelne busnesses, and (3) rural to urban mgraton and rural to rural mgraton. Despte rapd economc growth, t s commonly beleved that sgnfcant nsttutonal barrers stll exst n Chna s rural economy and dampen off-farm labor market partcpaton. Under the HRS, land s stll collectvely owned. Households have only land-use rghts. Land holdngs are subject to perodc readjustment n response to households changng worker to dependent ratos. Upon permanently leavng agrculture, farmers have to return the land to local authortes and consequently gve up a stream of potental land earnngs n the future. Moreover, Chnese farm households are under oblgaton to delver a part of ther gran output to the State at prces specfed by the government. Farm households are thus restrcted to allocate labor to alternate employment. Land tenure arrangements and mandatory marketng delvery quotas have been accused of retanng more labor than s optmal n agrculture to fulfll ther oblgatons (Cook 1999, Benjamn and Brandt 2002). Rural-to-urban mgraton has been shown to be crcular and temporary (Zhao, 1999). 20

31 Table 2-1 Rural Labor Force Dstrbutons Among Economc Actvtes (mllons) Year Total Rural Laborers Agrcultural Laborers Nonagrcultural Laborers (total) Nonagrcultural TVE Workers NA NA NA=Not Avalable Sources: Yang 2003, Chna s Labor Market, Table 1 21

32 Chapter 3 Lterature Revew An abundant lterature has evolved that nvestgates the determnants of farm household nvolvement n non-farm labor markets n the USA and n other developed countres. Research to assess Chnese rural labor markets and studes on multple-job holdng by Chnese farmers has just surged snce the early 1990 s. Due to dfferent stages of economc development, t s not surprsng to notce the dramatc dfferences n Chnese rural labor markets and ther Amercan counterparts. For example, most studes about off-farm labor markets n the USA have found educaton to be a key determnant of labor supply and ncome dstrbuton. The most unusual result arsng from the analyss of the Chnese rural labor supply s the nsgnfcant effect of educaton, whch suggests that labor allocaton s not market-based yet n certan parts of rural Chna. Revewng lterature about the USA and other developed countres help to perceve the dfference, as well as shed lght on the research method of ths dssertaton. Secton 3.1 revews some research that have been conducted n the USA and other developed countres. Secton 3.2 revews some research that has been performed about Chnese rural labor markets. 22

33 3.1 Lterature about the USA Fugutt (1959) used the push-pull hypothess 7 of mgraton theory to explan off-farm employment. He conducted multple regresson analyss to test the hypothess that off-farm employment s drectly related to off-farm opportuntes and negatvely related to farmng opportuntes based on hs Wsconsn data. The hypothess was strongly supported by hs emprcal results for all farms, and for commercal farms analyzed separately. Lee (1965) demonstrated that the decson by a farm operator to allocate part of hs resources (manly labor) to non-farm employment may be both consstent and ratonal wth the goals of maxmzng famly ncome and makng effcent use of farm and famly resources. Polzn and MacDonald (1971) strengthened Lee s explanaton, showng that farm households allocated ther labor resources between farmng and off-farm employment to maxmze ther labor returns. Huffman (1973a) ntated a study of multple job holdngs by analyzng the offfarm labor supply of farm operators. He also used the 1964 Census of Agrculture, whch covered 276 countes n three states: Iowa, North Carolna, and Oklahoma. A theoretcal model of labor supply was used to derve an off-farm labor supply equaton, whch ndcated the change n the number of days worked at off-farm employment as a functon of changes n non-farm earnngs, the wage rates of the farm operators and ther spouses, and several other household behavor varables. The coeffcents of the explanatory 7 A mgraton theory that suggests that crcumstances at the place of orgn (such as poverty and unemployment) repel or push people out of that place to other places that exert a postve attracton or pull (such as a hgh standard of lvng or job opportuntes). 23

34 varables had the expected sgns n general and hgh explanatory power. Mshra (1996) ponted out that Huffman s study was defcent n two ways. Frst, the theoretcal model could not be used to explore the effects of a change n returns of labor n farmng work on off-farm labor supply, because Huffman assumed that the farm operator receved only one wage the off-farm wage. Second, Huffman formulated the theoretcal model on the behavor of ndvdual households, whereas he used aggregated data. OLS estmaton of labor supply can lead to a certan degree of aggregaton bas n comparson wth fttng the same equaton to ndvdual cross secton data. Sexton (1975) used ndvdual farm operator data to estmate the off-farm labor supply. He derved the supply model from household behavor theory. Two dfferent surveys, one from the southeastern part of the Unted States and the other from Illnos, were utlzed. Spouses were ncluded n the household model. Off-farm work hours were estmated by OLS, and wage rates, farm hours worked and famly composton varables were used as explanatory varables. The operator s farmng hours was the only farm characterstc used n the study. The results showed that the number of hours worked off the farm was negatvely related to age and schoolng level. The spouses wage rate and non-labor ncome had lttle effect on the farm operators decson about the number of off-farm workng hours. Barros (1976) employed logt estmaton procedures to estmate the askng and offered wage rates equaton of the off-farm work decson, whch helped hm to estmate the off-farm labor supply functon of farm operators. Based on the earler studes of Lee (1965) and Polzn and Macdonald (1971), Huffman (1976) extended research on the determnants of total labor supply and off-farm labor supply. He showed how the labor 24

35 supply responds to changes n household non-earnngs ncome, farm and off-farm wage rates, commutng dstance to off farm work, and household envronment varables. Farm and off-farm wage rates and commutng dstance to off farm work sgnfcantly affected both total and off-farm labor supply. The non-earnngs ncome elastcty of total and offfarm labor supply was postve. Farm household characterstcs such as husband s and wfe s schoolng level, husband s age, number of young chldren, number of older chldren, other adults n the household and race had strong effects on the number of days worked off farm. Sumner (1978) used the same data as Barros and Sexton to analyze off-farm labor supply by comparng the margnal values of tme spent n dfferent actvtes. He dentfed factors to show that farm operators could perceve the value of tme spent n farmng, off-farm jobs, and non-work actvtes. Sumner s emprcal model consdered the partcpaton queston and the possbltes of sample selecton bas that mght arse n the OLS wage and hours equaton, though no statstcal evdence of such bas was detected. Sumner gnored the ssue of smultanety of farm and off-farm hours wth each other and other farm factors. Bollman (1979) suggested that the farm operator s total labor supply (total of farm labor and off-farm labor supply) s a functon of the prce of the consumpton good, the prce of operator s lesure, and non-earned ncome. He also suggested that the farm operator s total labor demand functon s knked. An ndvdual farmer s demand for farm work s a functon of the prce of farm labor, the prce of other nputs, the prce of farm output, and demand for off-farm work s a functon of the expected off-farm wage, whch s a functon of the operator s skll and commutng cost. The operator s assumed to be 25

36 ndfferent between farm and off-farm work f the margnal returns to labor are the same. When the prce of the operator s labor farm work exceeds the expected off-farm wage, the farm operator s farm labor demand curve s downward slopng. The number of hours worked s determned by the ntersecton of the supply and demand curves. Huffman (1980) used a famly utlty functon and budget constrant to study offfarm labor supply by farm operators n Oklahoma, North Carolna and Iowa. Household utlty s assumed to be a functon of lesure and consumpton, gven a member s age, educatonal level and household sze. The utlty maxmzaton s assumed to face three constrants: (1) tme endowments to be allocated among farmng, off-farm employment and lesure; (2) household ncome ncludng net farm ncome, off-farm ncome and other household ncome; and (3) farm output. The second constrant lmts the household s consumpton level and the thrd constrant lmts the household s budget sze. Consequently, the total labor supply s a functon of the off-farm wage rate, the prce of farm output, the prce of nputs, the prce of consumpton, household ncome, household sze, age, educaton, extenson and tme endowments. The results showed that farmers off-farm labor supply s postvely correlated wth farmer s educaton and extenson nput. Results also suggested that farmers wth hgher educaton levels reallocated ther labor resources from farm work to off-farm work faster than those wth lower educaton level. Kmh and Lee (1996) appled a mnmum dstance estmator to a system of smultaneous equatons descrbng farm men s and women s on-farm and off-farm jont labor supply decsons. The data set utlzed s from Moshav, Israel, whch only ncluded qualtatve ordered realzatons of the dependent varables. The man fndng s that an 26