Overall, agricultural employment is found to be responsive to relative changes in returns to agricultural labour. Given this responsiveness, one would expect that a technological change or a government policy that causes farm incomes to increase, such as for example an agricultural subsidy programme, would have a positive impact on agricultural employment. However, despite massive subsidies, agricultural employment in industrialised countries has been steadily decreasing over the past decades. This paper provides a new explanation for this puzzle, namely the positive impact of increased farm income on the educational level of farmers’ children. If farmers are credit constrained, they may under-invest in their children’s education. An increase in farm incomes will then allow more farmers to educate their children and if higher educated children are less willing to become farmers, in the long run increased farm incomes may lead to a reduction of labour supply in the agricultural sector. The paper provides both theoretical and empirical evidence supporting this argument.
Ruxanda Berlinschi is assistant professor at HUBrussel. Jo Swinnen and Kristine Van Herck are Senior Fellow and Research Assistant, respectively, at CEPS and researchers at LICOS, K.U. Leuven.