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Farm Household Incomes And Reforming The Cap

  • Frahan, Bruno Henry de
  • Nkunzimana, Tharcisse
  • De Blander, Rembert
  • Gaspart, Frederic
  • Sumner, Daniel A.

Low and variable farm income has been a main rationale for heavy government intervention in agricultural markets and income transfers to farmers whether in Europe in response to disruptive agricultural imports and low world prices at the end of the 19th century or in the US in response to the Great Depression. While the future of the Common Agricultural Policy (CAP) is again discussed and new directions are examined, it is fundamental to know to what extent low and variable farm income is still a problem in contemporary European agriculture and a valid rationale for designing the new CAP. In this context, this paper first examines the income level and distribution of farm households compared to those of non-farm households for a selection of OECD countries. Second, the paper econometrically investigates whether explanations for low farm income given in the literature apply to the selected OECD countries for the 1980-2000 period. Third, the paper concludes with some policy implications. Both the descriptive and econometric analyses use the microeconomic dataset from the Luxembourg Income Study (LIS). This dataset contains socio-demographic, income and expenditure data that are collected at the household level through household-based budget surveys. These data are recorded in the LIS dataset in a harmonized way for the 30 countries that currently participate in the LIS. Average income levels as well as indicators of poverty and inequality are calculated for farm and non-farm households for the OECD countries that have at least three waves of data in the LIS dataset with a minimum of 30 identified farm households surveyed in each wave1. Three sets of explanations for low farm household income drawn from the literature review of Gardner (1992) are successively investigated: (i) the commodity market conditions, (ii) the earning disequilibrium between sectors, and (iii) the compensating differential for skill differences and non-pecuniary aspects2. Preliminary results confirm that in most of the 12 selected OECD countries the average farm household income is greater than the average non-farm household income. Lower average farm household income tends to occur sporadically for some years in only six of the 12 selected OECD countries. In five of the nine selected European countries, the average farm household incomes clearly tend to improve compared to the average non-farm household incomes during the 1985-95 period. They are well above the average household incomes. The incidence of poverty tends to be less severe among farm households than nonfarm households except for two European countries. In contrast, the intensity of poverty tends to be more severe among farm households than non-farm households in most countries. This implies that in general there are relatively fewer poor farm households compared to non-farm households but the severity of their poverty is stronger. In addition, the income distribution is more equal among farm households than non-farm households in all countries. In the final version of the paper, it is expected that each set of explanations for low farm household income would play a role in understanding the evolution of farm household incomes across countries. Depending on whether one set of explanations tends to dominate the others in one particular group of countries, public interventions can be designed and emphasized in a new CAP for improving and stabilising incomes of farm households.

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File URL: http://purl.umn.edu/44814
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Paper provided by European Association of Agricultural Economists in its series 109th Seminar, November 20-21, 2008, Viterbo, Italy with number 44814.

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Date of creation: 13 Nov 2008
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Handle: RePEc:ags:eaa109:44814
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  1. J. A. Hausman & W. E. Taylor, 1980. "Panel Data and Unobservable Individual Effects," Working papers 255, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Gardner, Bruce L, 1992. "Changing Economic Perspectives on the Farm Problem," Journal of Economic Literature, American Economic Association, vol. 30(1), pages 62-101, March.
  3. John Shea, 1997. "Instrument Relevance in Multivariate Linear Models: A Simple Measure," The Review of Economics and Statistics, MIT Press, vol. 79(2), pages 348-352, May.
  4. Chatelain, Jean-Bernard, 2007. "Improving consistent moment selection procedures for generalized method of moments estimation," Economics Letters, Elsevier, vol. 95(3), pages 380-385, June.
  5. Bruce L. Gardner, 2000. "Economic Growth and Low Incomes in Agriculture," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 82(5), pages 1059-1074.
  6. Donald W. K. Andrews, 1999. "Consistent Moment Selection Procedures for Generalized Method of Moments Estimation," Econometrica, Econometric Society, vol. 67(3), pages 543-564, May.
  7. Michael F. Förster, 1994. "Measurement of Low Incomes and Poverty in A Perspective of International Comparisons," OECD Labour Market and Social Policy Occasional Papers 14, OECD Publishing.
  8. Magdalinos, Michael A, 1988. "The Local Power of the Tests of Overidentifying Restrictions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(3), pages 509-24, August.
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