Nonfarm Employment and Rural Welfare: Evidence from the Himalayas

The potential importance of nonfarm employment for the welfare of rural households has long been recognized, but whether the nonfarm sector offers prospects for improving the welfare of the rural poor remains a contentious issue. We examine distributional and well-being effects of nonfarm employment of rural households in the Himalayas. We account for heterogeneity of nonfarm employment, and estimate a system of structural equations to better understand the causal linkages between nonfarm employment and household well-being. The results confirm that disaggregating nonfarm employment activities matters for understanding the relationship between nonfarm employment and rural welfare. While low-return nonfarm employment is associated with lower income inequality, high-return nonfarm activities have a disequalizing effect on the distribution of household incomes. We also find that the ability to engage in high-return nonfarm activities is associated with higher economic well-being. Poor households, on the other hand, tend to rely on low-return activities that do not contribute to improved well-being.