Are Changes in Farm Size and Labor Allocation Structurally Related? Dynamic Panel Evidence from Israel

This paper deals with structural changes that are observed in farm sectors in many developed economies: the increase in farm size and the shift of labor away from agriculture. Using panel data on Israeli farm communities for the years 1992-2001, we estimate a system of simultaneous equations in which farm size and the fraction of labor devoted to agriculture are determined jointly in a dynamic setting. We employ the Arellano and Bond dynamic panel GMM algorithm for each of the equations, treating the other variables as endogenous and allowing for unobserved heterogeneity and for time trends that depend on geographical and institutional factors. The results exhibit positive and statistically significant autoregressive effects in both size and labor allocation. We find, as in earlier studies, that the association between farm size and farm labor allocation is positive, but the causality goes from size to labor and not in the opposite direction. This implies that independent factors that increase the level of agricultural activity help to moderate the rate of labor exodus from farming. On the other hand, independent factors that pull labor out of agricultural production do not significantly reduce the level of agricultural activity, perhaps because family labor is replaced by hired labor and/or capital investments. Farm growth seems to be quite heterogeneous across types of farm communities, with aggregate farm growth occurring mostly in relatively young communities in the south of the country, while agricultural activity on other farm communities is stagnant or even shrinks over time. Continuation of these processes could lead, in the long run, to concentration of agricultural production in a small number of large, business-oriented, farm enterprises.