1) Off-farm income makes up 18% of rural household income in Ethiopia, with wage income contributing 10%. Agricultural wages are twice as important as non-agricultural wages. 2) Off-farm income and wages are most important for poorer households and play a significant role in livelihoods. 3) Rural wages have increased substantially in recent years, driven partly by agricultural growth performance. Real wages were 54% higher in 2015 compared to 2004.

1. ETHIOPIAN DEVELOPMENT
RESEARCH INSTITUTE
Non-farm income and labor markets in
rural Ethiopia
Fantu Bachewe, Guush Berhane, Bart Minten, and Alemayehu S. Taffesse
IFPRI-ESSP
Transformation and vulnerability in Ethiopia: New evidence to inform policy
and investments
27 May 2016
Getfam Hotel, Addis Ababa
1

2. 2
1. Introduction
• Development of well-functioning labor markets crucial for
economic growth and livelihood opportunities, especially for youth
• Rural wage increases strongly linked with poverty reduction
• The poor regularly depend on such wages for their livelihood
• Important to understand the off-farm sector and labor markets
• Ethiopia’s economy is changing fast but unclear how important the
off-farm economy and labor income is in rural areas

3. 3
1. Introduction
• Purposes of the presentation:
- How important is the rural off-farm economy?
- What are the associates of off-farm income?
- Are rural wages changing?
- What are the drivers and implications of that change?
• A number of datasets used
• CSA wage data;
• Agricultural Growth Programme (AGP) survey;
• Other large-scale household datasets used.

4. 4
3. Off-farm income in rural areas
• Crop income as source of rural income overwhelming (71%)
• Wage income (10%) as important as livestock income
• Agricultural wages twice as important as non-agricultural wages
• Enterprise income: 8%
0
20
40
60
80
100
All Tigray Amhara Oromiya SNNP
%
Income sources in rural areas (AGP)
Crop Livestock Agricultural wage Non-ag. wage Enterprise

5. 5
3. Off-farm income in rural areas
• Off-farm income and wage income especially important for the poor
• Enterprise income shares higher for poorest and richest, reflecting
different enterprises
0
10
20
30
40
50
60
70
80
90
0
2
4
6
8
10
12
14
Quintile I Quintile II Quintile III Quintile IV Quintile V
Contributionofcropincome(%)
Contributionofnon-cropincome(%)
Ag wage Non-ag wage Enterprise Livestock Crop

6. 6
3. Off-farm income in rural areas
• Off-farm income and wage income especially important for the poor
• Enterprise income shares higher for poorest and richest, reflecting
different enterprises
0
10
20
30
40
50
60
70
80
90
0
2
4
6
8
10
12
14
Quintile I Quintile II Quintile III Quintile IV Quintile V
Contributionofcropincome(%)
Contributionofnon-cropincome(%)
Ag wage Non-ag wage Enterprise Livestock Crop

7. • Prepared food/drinks & crafts more important for the poor
• Agricultural output & merchandise trade more important for the rich
Type of business enterprises engaged, by wealth quintile (%)
3. Off-farm income in rural areas
0
5
10
15
20
25
30
35
40
Quintile I Quintile II Quintile III Quintile IV Quintile V
Food and local drinks Crafts Trade-agricultural Outputs Trade-merchendise

8. • Prepared food/drinks & crafts more important for the poor
• Agricultural output & merchandise trade more important for the rich
Type of business enterprises engaged, by wealth quintile (%)
3. Off-farm income in rural areas
0
5
10
15
20
25
30
35
40
Quintile I Quintile II Quintile III Quintile IV Quintile V
Food and local drinks Crafts Trade-agricultural Outputs
Trade-merchendise Others

9. 9
3. Off-farm income in rural areas
• 18% off-farm income in rural Ethiopia:
- Small compared to other African countries
- Small compared to Asia and Latin-America
0
10
20
30
40
50
60
Ethiopia Africa Asia Latin-America
%
Local non-farm Migration income

10. 10
4. Agricultural wage labor
• Hired agricultural wage labor: 7% of all labor
• Relatively more important in Tigray and SNNP
0
20
40
60
80
100
All Tigray Amhara Oromiya SNNP
%
Hired labor in crop production
Family labor Hired labor

11. 11
4. Agricultural wage labor
• Importance of hired labor varies by task
• In teff, less hired labor during production; most at harvest and
afterwards
0
20
40
60
80
100
%
Labor by crop activity
Family Hired Exchange

12. 12
4. Agricultural wage labor
• Labor arrangement in teff differ by remoteness
• Monetization/use of hired labor higher when less remote;
• In more remote areas, more reliance on exchange labor
Family, wage, and exchange labor use in teff production
0
20406080
share(%)
0 50 100 150
distance to Addis (Birr/quintal)
95% CI family labor
95% CI wage labor
95% CI exchange labor

13. 13
5. Rural wages - changes
• Rely on CSA price data from 2004 to 2015
• Use different ways of converting/deflation (exchange rate; CPI)
• Wages in US dollars over 3 times higher in 2015 compared to 2004
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Jul-04
Feb-05
Sep-05
Apr-06
Nov-06
Jun-07
Jan-08
Aug-08
Mar-09
Oct-09
May-10
Dec-10
Jul-11
Feb-12
Sep-12
Apr-13
Nov-13
Jun-14
Jan-15
Aug-15
Wages in US dollars

14. 14
5. Rural wages - changes
• Urban & rural wages deflated by general consumer price index (GCPI)
• Between 2004 and 2015: Real wages increased by 54% in rural areas
and by 64% in urban areas
20
25
30
35
40
45
50
Jul-04
Feb-05
Sep-05
Apr-06
Nov-06
Jun-07
Jan-08
Aug-08
Mar-09
Oct-09
May-10
Dec-10
Jul-11
Feb-12
Sep-12
Apr-13
Nov-13
Jun-14
Jan-15
Aug-15
RealwagesinDecember2011prices
GCPI deflated-rural
GCPI deflated-urban

15. 15
5. Rural wages - changes
• Agricultural wages on average 1.27 USD per day (in AGP zones);
however significant variation
• Compared to Asian countries, wages significantly lower; about 1 USD
higher in Nepal and Myanmar; 1.59 USD higher in Bangladesh
05
101520
0 2 4 6 8
Agricultural wages (USD/day) 0 3 6 9 12
Nepal (2010)
Sri Lanka (2012)
Myanmar (2004)
Malaysia (2012)
Bangladesh (2010)
Ethiopia (2012)
USD/day
Distribution of wages in AGP zones Comparison of wages in Ethiopia with
Asian countries

16. 16
5. Rural wages - drivers
Look at the drivers for wage changes:
• Estimate the following regression: Ln (real wage) = a + b lnY + e
• Growth in unskilled real wage linked with economic growth,
particularly with agricultural growth
Economic growth and unskilled real wage elasticity
Real… Elasticity of rural wages
GDP 0.22
Agricultural GDP 0.24
Manufacturing GDP 0.19
Industry GDP 0.17
Services GDP 0.15
Note: All estimates are statistically significant at 1%.

17. 17
5. Rural wages - drivers
Look at the drivers for wage changes:
• Role of the Productive Safety Net Program (PSNP)
20
25
30
35
40
45
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Real wage PSNP vs non-PSNP areas (real birr/day)
PSNP non-PSNP

18. 18
5. Rural wages - implications
1. Herbicides use increasing
• Rapidly taking off in Ethiopia (2013 imports 5 times higher than 2002)
• Herbicides is negatively associated or a substitute for weeding labor
2. Mechanization:
- Higher wages provide incentives for mechanization in agriculture
- In Ethiopia, mechanization is still rather low; In FTF survey, estimated:
- 9% of farmers use some form of mechanization
0
20406080
Povertyheadcountindex
10 20 30 40 50 60
Real wages, December 2011 prices
95% confidence interval
Predicted poverty head count index
3. Poverty:
Real wages and poverty
head count index
negatively correlated

19. 19
6. Conclusions
• Major findings:
1/ Off-farm income makes up 18% of total income of rural households;
• Wage income contributes 10%, as important as livestock income
2/ Off-farm income especially important for the poorest
• Makes up 26% of their total income (agricultural wage 13%)
3/ Rural wages are rapidly increasing;
• Real wages 54% higher in 2015 compared to 2004;
• Improved agricultural performance contributed to that change
4/ Off-farm income and wages significantly lower than other countries
5/ Implications of wage changes on poverty and agricultural production
practices (more use of herbicides)

20. 20
6. Conclusions
• Implications:
1/ Low wages have been an asset to attract labor-intensive industries.
• This might be changing and Ethiopia might slightly lose that edge
• Ensure that the youth upgrade skills towards higher labor productivity
2/ Push for the adoption of labor-saving technologies;
• Important that Ethiopia pro-actively implements policies that allow
appropriate technologies at low costs
3/ Ensure flexible labor markets so that people can benefit from these
opportunities

21. Thank you.

22. Thank you.

23. 23
3. Off-farm income in rural areas
• ERSS (national representative) paints a rather similar picture
• Differences: 1/ Livestock more important than in AGP areas;
2/ In the 4 regions, higher wage and enterprise income in high potential areas;
3/ Wage and enterprise income in four regions lower than in other regions
0
20
40
60
80
100
Four
regions
Tigray Amhara Oromiya SNNP Four
regions
Afar &
Somalie
BG, DD,
Gambella,
& Harari
%
AGP (2010/11) ERSS (2013/14)
Crop Livestock Ag. Wage Non-ag. Wage Enterprise

24. Crafts
16%
Trade-grains
16%
Trade-livestock
11%
Trade-non
agricultural
10%
Milling
1%
Tella (local ale)
5%
Araqi (local
liquor)
19%
Enjera/Dabbo
(bread)
3%
Other
19%
Type of business enterprise engaged, (%)
3. Off-farm income in rural areas

25. 25
3. Off-farm income in rural areas
• Major results on diversification (Tobit model with diversification index
as dependent variable):
1. Younger heads of households are more likely to be associated with
off-farm income (esp. agricultural wages and enterprise income)
2. Education associated with higher enterprise and non-ag. income
3. Gender link: Women make up 1/3rd of hired labor; men 2/3rds.
4. More and better quality agricultural assets associated with less
diversification
5. Distance to cities an important associate of non-farm income.
Households 100 kms farther from Addis have 11% lower share of off-
farm income.

26. 26
4. Agricultural wage labor
• Associates of agricultural wages:
1. Time of year: compare to land preparation,
• 13 % lower at planting, 12% higher at weeding; 17% higher at
harvesting
2. Gender: men earn 8% more
3. Age: older people earn less (0.2% less per year extra)
4. Remoteness: 100 kms away from Addis reduces wage by 7%
5. Poverty in the zone: The higher the poverty, the lower the wage
6. Regions: higher wages in Tigray and Amhara

27. 27
5. Rural wages - implications
4. Impact of off-farm income on modern input use
- Off-farm income might lead to relaxation of credit constraints in
period of input needs
- Study finds positive association between fertilizer use and off-farm
income (using probit model on AGP data):
• Households that had off-farm income were 7% more likely to use
chemical fertilizer
- No association with improved seeds and agro-chemicals

28. Contribution of income sources by wealth quintile (all assets
included)
0
10
20
30
40
50
60
70
80
0
2
4
6
8
10
12
14
16
18
Quintile I Quintile II Quintile III Quintile IV Quintile V
Contributionofcropincome(%)
Contributionofnon-cropincome(%)
Livestock Wage Enterprise Crop

29. 29
5. Rural wages - implications
2. Increasing use of herbicides
0
5
10
15
20
Herbicides imports (millions USD)

30. 30
5. Rural wages - implications
2. Increasing use of herbicides
Herbicides is a substitute for weeding; rapidly taking off in Ethiopia
0123
0 2 4 6
Log(weeding labor/ha)
95% interval correlation
0
20406080
100
%offarmers
0 50 100 150
Transport costs to Addis (Birr/quintal)
95% CI herbicides 2012
95% CI herbicides 2002

31. 31
5. Rural wages - implications
3. Mechanization
- Higher wages provide incentives for mechanization in agriculture
- In Ethiopia, mechanization is still rather low; In FTF survey, estimated:
1. 9% of farmers use some form of mechanization
• 5% in plowing; 3% in harvesting; 2% in threshing
2. Strong threshold effect (Berhane et al., 2016)
Rural wages
and use of
mechanization

32. • Prepared food/drinks & crafts more important for the poor
• Agricultural outputs & merchandise trade more important for the rich
Type of business enterprises engaged, by wealth quintile (%)
3. Off-farm income in rural areas
0
5
10
15
20
25
30
35
40
45
Quintile I Quintile II Quintile III Quintile IV Quintile V
Food and local drinks Crafts Trade-agricultural Outputs
Trade-merchendise Others