1. Analysis of farm household incomes in OECD countries Master in Agricultural, Food and Environmental Policy Analysis Université catholique de Louvain University of Bonn Supervisor: Prof. Bruno Henry de Frahan Laura Borge del Rey

2. Outline IntroductionResearch objectives and HypothesisComparison of farm/non-farm household income levelsComparison of farm/non-farm hh income inequalitiesMethodologyEconometric ResultsConclusions 2

3. Introduction (1) 3

4. Introduction (2)  Gardner (1992) looks at the farm problem and identifies these key contributions to the problem: Supply-demand model based on commodity market conditions Disequilibrium between the farm and non-farm labour markets Income differences as a result of skill differences or non-wage aspects of farm/non-farm employments 4

5. Introduction (3)  The characteristics of the supply-demand model of aggregate agricultural commodities are that for agricultural products:  Very inelastic D  Very inelastic S  D increases slowly over time  S increases faster than D declining and volatility of farm prices and low incomes for farm people 5

6. Introduction (4)  A disequilibrium between the farm and non-farm labour markets that keeps farm people with lower incomes in the agri. sector.  In the short term : As a result of costs involved in labour movement such as job search and moving expenses.  In the long term: differences in education, lack of skills to work out of farm and age between farm and non-farm jobs. (Johnson (1953)). 6

7. Introduction (5)  Gardner (2002) proposes these factors to explain growth in farm household incomes in the US since 1950:  Agricultural productivity growth;  Saving and investment by farm people;  Adjustment to disequilibrium through migration of workers from farm jobs to non- farm jobs;  Off-farm work opportunities for farm people;  Improved skills of farm people;  Government policies aimed to provide financial aid to farm people and rural areas. 7

8. Research objectives  Assess whether the “farm income problem” still prevails nowadays in OECD countries by providing the evolution of average farm hh incomes in comparison to average non-farm hh incomes from1971 to 2010.  Examine the inequality of farm/non-farm hh incomes by providing the evolution of the Gini index of farm hh incomes relative to the Gini index of non-farm hh incomes over the same period.  Examine whether the contributions identified in the literature are valid in explaining low farm income in OECD countries over the period 1971 to 2010. 8

9. Research Hypothesis 9  «Farm income problem» has diminished in developed countries. Therefore, farm income levels have converged non-farm income levels.  Farm household incomes are less equally distributed than non-farm household incomes.  Commodity market conditions, labour market conditions, income differences as a result of skill and age disparities and other factors such as government intervention affect farm hh incomes in comparison to non-farm hh incomes.

10. Comparisons farm/non-farm hh incomes(1)  Luxembourg Income Study (LIS)  Microeconomic data collected by countries through national household-based budget surveys.  Criteria to select countries:  > 3 waves of data survey in the LIS database.  The surveys separate between farm self- employment income and non-farm self-employment income.  The surveys contain a minimum of 30 farm hh. 10

11. Comparisons farm/non-farm hh incomes(2) CountrySurvey Wave Australia1981, 1989, 1995, 2001, 2003 Austria1994, 1997, 2000 Canada1971,1975,1981,1987,1991,1994,1997,1998,2000,2004,2007 Finland1987, 1991, 1995, 2000, 2004 France1979,1984, 1989, 1994 Germany1973,1978, 1983, 1984, 1989, 1994, 2000 Hungary1991, 1994, 2005 Ireland1987, 1994, 1995, 1996, 2000, 2004 Italy1987,1989, 1991, 1993, 1995, 1998, 2000 Luxembourg1985, 1991, 1994 Netherlands1987, 1993, 1999 Norway1979, 1986, 1991, 1995, 2000, 2004 Poland1995, 1999, 2004 Switzerland1992, 2000, 2002 United Kingdom1979, 1986, 1991, 1995, 1999 United States1974, 1979, 1986, 1991, 1994, 1997, 2000, 2004, 2007, 2010 16 countries84 observations 11

12. Comparisons farm/non-farm hh incomes(3)  Defining farm/non-farm hh: Distinction between farm and non-farm hh is made according to the source of income. According to this, farm hh are hh having farm self-employment income.  Following OECD(2001), narrow definition of farm hh is used: hh whose farm self-employment income is => than 50% of their factor incomes (paid employm. income+self-employm. income+capital income). /non-farm hh: hh whose farm self- employment income is null. 12

13. Comparisons farm/non-farm hh incomes(4) 13  Defining income: Cash disposable household income (DPI) is used. + paid employment income + self-employment income + capital income + social security transfers - taxes and social security contributions  Ratio of average income (DPI) of farm households narrowly defined to the average income (DPI) of non-farm households narrowly defined is computed for each country and survey wave.

14. Comparisons farm/non-farm hh incomes(5) Average DPI of farm households (narrow definition) to average DPI of non-farm households (%) in Australia, Canada, and USA. Source: LIS 14

15. Comparisons farm/non-farm hh incomes(6) Average DPI of farm households (narrow definition) to average DPI of non-farm households (%) in Finland, Ireland, Norway and United Kingdom. Source: LIS 15

16. Comparisons farm/non-farm hh incomes(7) Average DPI of farm households (narrow definition) to average DPI of non-farm households (%) in Austria, Germany, Luxembourg, Netherlands and Switzerland. Source: LIS 16

17. Comparisons farm/non-farm hh incomes(8) Average DPI of farm households (narrow definition) to average DPI of non-farm households (%) in France and Italy. Source: LIS 17

18. Comparisons farm/non-farm hh incomes(9) Average DPI of farm households (narrow definition) to average DPI of non-farm households (%) in Hungary and Poland. Source: LIS 18

19. Comp. farm/non-farm hh inc. inequalities(1) 19  Luxembourg Income Study (LIS)  Gini index as a measure of inequality. It is 0-1, 0 means perfect equality and 1 perfect inequality.  Ratio of the of the Gini index of farm households narrowly defined to the Gini index of non-farm households narrowly defined is computed for each country and survey wave.

20. Comp. farm/non-farm hh inc. inequalities(2) 20 Ratio of the Gini index of farm-households (narrow definition) to Gini index of non-farm households (%) in Australia, Canada and United States. Source: LIS

21. Comp. farm/non-farm hh inc. inequalities(3) 21 Source: LIS Ratio of the Gini index of farm-households (narrow definition) to Gini index of non-farm households (%) in Finland, Ireland, Norway and United Kingdom.

22. Comp. farm/non-farm hh inc. inequalities(4) 22 Source: LIS Ratio of the Gini index of farm-households (narrow definition) to Gini index of non-farm households (%) in Austria, Germany, Luxembourg, Netherlands and Switzerland.

23. Comp. farm/non-farm hh inc. inequalities(5) 23 Source: LIS Ratio of the Gini index of farm-households (narrow definition) to Gini index of non-farm households (%) in France and Italy.

24. Comp. farm/non-farm hh inc.inequalities(6) 24 Source: LIS Ratio of the Gini index of farm-households (narrow definition) to Gini index of non-farm households (%) in Hungary and Poland.

25. Methodology(1)  Econometric model to test whether commodity market conditions, labour market conditions, income- differences as a result of education and age disparities and other variables can explain average income differences between farm and non-farm households.  Unbalanced panel: 16 OECD countries from the LIS database covering the period 1971-2010. 25

26. Methodology(2)  Dependent variable: Ratio of the average income (DPI) of farm households to average income (DPI) of non-farm households. Explanations Independent VariablesExp. sign Commodity market conditions Agric. terms of trade+ Labour market conditions Standardized unemployment rate - GDP per capita- Population density- 26

27. Methodology(3) Explanations Independent VariablesExp. sign Income-earning capacity Low education ratio- High education ratio+ Age ratio+/- Government intervention Farm direct payments+ General agricultural services + Other factors Real long term interest rates - 27

28. Methodology(4) 28

29. Methodology(5) 29

30. Methodology(6) 30

31. Results(1) Independent variableCoeffStd.ErrP>ltl Commodity market conditions Agricultural terms of trade0.1770.1590.272 Labour market conditions Standarised unemployment rate 0.0490.0690.480 GDP per capita-0.1280.1280.322 Population density-0.0240.0220.286 Number of observations84 F-test of regressionF (11,72)=6.48 Prob>F=0.000 31

32. Results(2) Independent variableCoeffStd.ErrP>ltl Income-earning capacity Low education level ratio-0.5390.1170.000 High education level ratio-0.0370.0220.105 Age ratio0.8790.4670.064 Government intervention Farm direct payments0.0270.0220.217 General agricultural services0.0010.0290.961 Other variables Real long term interest rates-0.0210.0120.089 Time0.0470.0110.000 32

33. Conclusions (1)  Average incomes of farm households are close to or higher than those of non-farm households in most of the surveyed OECD countries from 1971 to 2010.  The Gini index (that estimates the degree of inequality in income distribution) show that farm household incomes are more unequally distributed than non- farm households in most of the surveyed OECD countries over the same time period. 33

34. Conclusions (2) 34  Econometric results suggest that income of farm- households are more affected by the low education level, the age ratio and the real long term interest rates.  However, they are not influenced by commodity market conditions, labour market conditions and government intervention.  It was also found that the average farm household incomes have increased with respect to the average non-farm household incomes over the period 1971 - 2010.

35. Thank you! 35