How land fragmentation affects off-farm labor supply in China: Evidence from household panel data

Research on agricultural development in China has increasingly paid attention to the potentially negative effects of highly fragmented farm structures. This study provides a deeper theoretical understanding of the linkages between land fragmentation and off-farm labor supply and investigates this relationship empirically in a more direct and robust way than in the existing literature. Drawing upon a rural household panel dataset collected in Zhejiang, Hubei and Yunnan provinces from 1995-2002, we estimate the effects in two steps. First, we estimate the effect of land fragmentation on labor productivity using a time-demeaned translog production function. Second, we estimate the effect of land fragmentation on off-farm labor supply using Wooldridge’s (1995) panel data sample selection model. The production function results show that land fragmentation indeed leads to lower agricultural labor productivity. It implies that land consolidation will make on-farm work more attractive and thus decrease off-farm labor supply. This conclusion is supported by a direct estimation of the off-farm labor supply function, but only for the group of farmers with the least involvement in off-farm labor. Our analysis suggests that, if more liberal land market policies and hardened property rights will allow more consolidated farmland in the future, this will not trigger a flood of former farmers leaving rural areas in search for alternative incomes. As it makes farm work more productive, it will rather provide an incentive to continue farming and raise agricultural productivity.