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Weather Risk and the Off-Farm Labor Supply of
Agricultural Households in India

Takahiro Ito and Takashi Kurosaki

April, 2006

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Abstract

This paper investigates the effects of weather risk on the offfarm labor supply of agricultural households in India. Faced with the uninsurable risk of output fluctuations, poor farmers in less developed countries have various options to smooth income. One of these options is to diversify labor allocation across activities, which this paper focuses on. A key feature of this paper is that it pays particular attention to differences in the covariance between weather risk and agricultural wages on the one hand and between weather risk and nonagricultural wages on the other. We develop a theoretical model of household optimization, which predicts that the impact of weather risk on the offfarm labor supply is larger in the case of nonagricultural wage work than in the case of agricultural wage work when agricultural wages off the farm are positively correlated with own farm income. To test this prediction, we estimate a multivariate tobit model of labor allocation using household data from rural areas of Bihar and Uttar Pradesh, India. The regression results show that the share of the offfarm labor supply increases with the weather risk, and the increase is much larger in the case of nonagricultural wage work than in the case of agricultural wage work. Simulation results based on the regression estimates show that the sectoral difference is substantial, implying that empirical and theoretical studies on farmers' labor supply response to risk should distinguish between the types of offfarm work involved.

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