Family Labour Supply Decisions in Rural Peru

Abstract

Raising rural incomes and increasing agricultural production are two of the primary challenges facing policy-makers in developing countries. While increasing agricultural production calls for policies that raise the return to agricultural activities, higher rural incomes could be achieved by raising both agricultural and non-agricultural returns. The resulting impacts on incomes and agricultural production depend heavily upon the family labour supply responses in both agricultural and non-agricultural activities. Because raising the return of one work activity relative to the other can induce a reallocation of labour between activities, both sectors must be considered jointly. For instance, if an increase in agricultural production comes at the expense of work in non-agricultural activities rather than leisure, the net effect on rural incomes may be negligible. If, at the same time, these policies result in a decline in agricultural output, then the cost of this decline needs to be considered in the evaluation of the policies.

We would like to thank Menno Pradhan and David Zimmerman for their excellent assistance in this research project. This paper has benefited greatly from comments by Angus Deaton, James Heckman, Jim Hosek, Costas Meghir, Mark Pitt, T. Paul Schultz, Jacques van der Gaag, Wim Vijverberg, Finis Welch, and seminar participants at Rand, UCLA, Yale University, and the World Bank.