Impacts of the CAP reform on pluriactivity and on labour markets

Transcription

1 Workshop Income and factor markets under the 2003 CAP reform Sevilla, June 28 29, 2007 Impacts of the CAP reform on pluriactivity and on labour markets Alessandro Corsi University of Torino and CHILD Università di Torino

2 Impacts of the CAP reform on pluriactivity and on labour markets Goal discuss the theoretical predictions of the impacts of the CAP reform on agricultural labour markets : pluriactivity waged labour

3 The CAP reform The CAP reform : many details Main points: decrease or abolition of coupled payments compensated for by a decoupled subsidy abolition of a coupled area or headage payment is equivalent to a price decrease

4 The theoretical model Using the familiar farm household model (Singh et al. 1986; Huffmann, 1991) the HH maximises utility (function of income and leisure) subject to time and income constraints income = farm + off farm + non labour income assumption of perfect markets

5 Farm household equilibrium (pluriactivity) Income I1 w D L C S N Total available HH labour O A B

6 A decrease in price support For a pluriactive farm, a decrease in price support: decreases farm work time (due to substitution effect) increases total work time (due to wealth effect) hence, increases off farm work time

7 Effect of a non compensated price decrease on pluriactivity Income I1 w D L C S N Total available HH labour O A' A B B'

8 A decoupled subsidy For a pluriactive farm, a decoupled subsidy: has no effect on farm work decreases total work time (due to wealth effect) decreases off farm work time

9 Effect of a decoupled subsidy Income I1 w D L C S N' N Total available HH labour O A B' B

10 Effects of the CAP reform on pluriactivity The effects of the CAP reform are the result of two counteracting effects: the price decrease (that would increase off farm work) the decoupled payment (that would increase it)

11 Effects of the CAP reform on pluriactivity Assumption: the decoupled subsidy exactly compensates for the loss from the price decrease, at the pre reform equilibrium Even with this assumption, the effects of the CAP reform on a pluriactive farm are undetermined : farm work decreases (due to negative substitution effect) but income possibility is greater decrease in total work time (due to positive wealth effect) hence, an undetermined effect on off farm work time

12 The decrease in price support compensated for by a decoupled subsidy Income I1 w D L C S N' N Total available HH labour O A B

13 Effect of CAP reform on pluriactivity Income I2 I1 D' D L' L w C S C' N' N Total available HH labour O A' A B' B

14 Effects of the CAP reform on pluriactivity Indirect effects: farmers adjust their production mix following the abolition of coupled payments supply of previously non subsidized crops likely to grow decrease in price farmers not receiving SFP suffer the price decrease more off farm work

15 Effects of the CAP reform on agricultural waged labour Effects of the CAP reform on a farm hiring waged work Two cases: a) Hired work is not a perfect substitute of family work b) Hired work is a perfect substitute (Substitutability depends on the type of farming, required skills, seasonal work vs. permanent work, etc. )

16 Effects of the CAP reform on agricultural waged labour a) If hired work is not a perfect substitute of family work, the overall effects of CAP reform (price decrease + SFP) are: no wealth effect on hired labour the price decrease lowers the marginal value product of hired work the effect is unambiguously a decrease in hired work

17 Effects of the CAP reform on agricultural waged labour b) If hired work is a perfect substitute of family work, the effect of a price decrease are: a decrease in total farm work time (due to negative substitution effect) an increase in family work time (due to negative wealth effect) hence, an unambiguous decrease of hired work time

18 Effect of a price decrease on agricultural waged labour Income w I2 I1 D L C D' C' N O L' B' A' A B Total available HH labour

19 Effects of the CAP reform on agricultural waged labour b) If hired work is a perfect substitute of family work, the effects of a decoupled subsidy are: no effect on total farm work time (no substitution effect) a decrease in family work time (due to positive wealth effect) hence, an unambiguous increase of hired work time

20 Effect of a decoupled subsidy on agricultural waged labour Income D' I2 I1 L' w D C' L C N' N Total available HH labour O A' B' A B

21 Effects of the CAP reform on agricultural waged labour b) If hired work is a perfect substitute of family work, the effects of the CAP reform (price decrease compensated for by the SFP) are: a decrease in farm work time (due to negative substitution effect) a decrease in family work time (due to positive wealth effect) hence, an undetermined effect on hired work time

22 Effect of the CAP reform on agricultural waged labour Income w I2 I1 D D' C C' L' L N' N Total available HH labour O A' B' A B

23 Effects of the CAP reform on agricultural labour markets Overall, very few theoretical predictions, if any Empirical analyses are needed to assess the effects of CAP reform Few empirical analyses: EU: Ooms & Hall, 2005 US: El Hosta, Mishra, Ahearn, 2004; Ahearn, El Hosta, Dewbre 2006; Dewbre, Mishra, 2002; Serra, Goodwin and Featherstone, 2005

24 Effects of the CAP reform on agricultural labour markets Mixed results Many results consistent with the theory Some puzzling results (no significant difference between coupled and decoupled payments; both increasing total work) Small magnitude of the effects

25 Effects of the CAP reform on agricultural labour markets Other factors at play reducing the responsiveness to the policy reform: Nonpecuniary returns from farming Reduction of risk aversion Expectations of future coupled payments Appropriation of decoupled subsidies by non operating landlords

26 Effects of the CAP reform on agricultural labour markets A few hints on further research directions: Over and under compensation Distribution of CAP support Market imperfections

27 Effects of the CAP reform on agricultural labour markets Over and under compensation The higher the decoupled subsidy, the larger the wealth effect decrease in off farm work, increase in waged work The larger the decrease in prices, the larger the substitution effect increase in off farm work, decrease in waged work Hence, if the decoupled subsidy more than compensates the decrease in prices, the former outcome is more likely to prevail; the reverse in case of under compensation

28 Effects of the CAP reform on agricultural labour markets Over and under compensation crucial for the net effects compensation can vary by area and by farm if farmers shift to more profitable products, they are more likely to over compensate depends on crop substitutability if the SFP is set according to historical entitlements, price variations may cause over or under compensation if crops not fully substitutable

29 Price indices of agricultural products EU 15 base 2000=100 (3 years ave., deflated prices) Soft wheat Oil seeds Cattle Pigs Grain maize

30 Effects of the CAP reform on agricultural labour markets Distribution of CAP support CAP support traditionally biased in favour of wealthier farms SFP based on historical entitlements do not change the bias, or may even worsen it (von Witzke and Noleppa; Schmid et al) If so, small farms more likely to increase off farm work

31 Effects of the CAP reform on agricultural labour markets Market imperfections All the above analysis was based on the assumption of perfect markets The most relevant market imperfections for this issue: off farm labour time rigidities job availability

32 Effects of the CAP reform on agricultural labour markets Off farm labour time rigidities Off farm work usually more constrained than on farm work If off farm work totally rigid (e.g., 8 h. or none), small adjustments of total work only possible on farm work Same effects as in the unconstrained situation, but discontinuous changes triggered by the CAP reform Low responsiveness to the policy change

33 Effects of the CAP reform on agricultural labour markets Job availability If no off farm job opportunities and SFP exactly compensates at the pre reform situation: the wealth effects of SFP and price decrease vanish only substitution effect decrease of farm work more likely in marginal areas and for older farmers

34 Effect of the CAP reform on a farm isolated from the labour market Income I2 I1 N' N O A' A Total available HH labour

35 Effects of the CAP reform on agricultural labour markets Job availability Shortage of waged farm workers output lower, farmer s work greater Immigration from non EU countries and from new member countries Difficult to disentangle this trend from the effects of CAP reform

36 Effects of the CAP reform on agricultural labour markets Conclusions No clear cut theoretical predictions Dramatic effects of CAP reform on pluriactivity and waged labour use quite unlikely More research needed Issue important for agricultural production, but also in a rural development perspective