Seasonal liquidity, rural labor markets and agricultural production: Evidence from Zambia

Many rural households in low and middle income countries continue to rely on small-scale agriculture as their primary source of income. In the absence of irrigation, incomes arrive only once or twice per year and have to cover consumption and input needs until the subsequent harvest. We develop a model to show that frictions in capital market access not only undermine households’ ability to smooth consumption over the cropping cycle, but also distort labor markets by pushing capital-constrained farmers to sell family labor off-farm to meet short-run cash needs. To identify the impact of intra-season credit availability on labor allocation and agricultural production, we conducted a two-year randomized controlled trial with small-scale farmers in rural Zambia. Our results indicate that lowering the cost of borrowing at the time of the year when farmers are most constrained (the lean season) lowers net labor supply, drives up wages and leads to a reallocation of labor from less to more capital-constrained farms. This reallocation reduces differences in the marginal product of labor across farms, increases average agricultural output, and reduces consumption and income inequality. ⇤We thank audience members at numerous seminars and conferences for comments and suggestions. We are grateful to the Growth and Labor Markets in Low Income Countries (GLM-LIC), the International Growth Centre, the Agricultural Technology Adoption Initiative (JPAL/CEGA) and an anonymous donor for financial support, and to Innovations for Poverty Action for logistical support. Many thanks to Rachel Levenson for careful oversight of the field work and to Daniel Velez Lopez, Chantelle Boudreaux and Carlos Riumallo Herl for assistance with the data. †Swiss TPH and Harvard T.H. Chan School of Public Health ‡Tufts University §University of Zambia