Can Labour Market Imperfections Explain Changes in the Inverse Farm Size-Productivity Relationship?: Longitudinal Evidence from Rural India

To understand whether and how inverse relationship between farm size and productivity changes when labor market performance improves, we use large national farm panel from India covering a quarter-century (1982, 1999, 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 non agricultural labor demand.