Can Labor Market Imperfections Explain Changes in the Inverse Farm Size–Productivity Relationship? Longitudinal Evidence from Rural India

The existence of an inverse relationship between farm size and output per unit of land is well documented. However, little research focuses on if and how an inverse relationship between farm size and productivity changes when labor market performance improves. To fill this gap, we use a large national farm panel from India covering a quarter-century (1982, 1999, and 2008) to show that the inverse relationship weakened significantly over time, despite an increase in the dispersion of farm sizes. A key reason was the substitution of capital for labor in response to nonagricultural labor demand. In addition, family labor was more efficient than hired labor in the 1982–1999 period, but not during the 1999–2008 period. In line with labor market imperfections as a key factor, separability of labor supply and demand decisions cannot be rejected in the second period, except in villages with very low nonagricultural labor demand.