Households' income-generating activities and marginal returns to labor in rural Tanzania

Abstract

This study uses detailed household-level data to investigate income and activity diversification among households in rural Tanzania. Unlike previous research on diversification, I explicitly evalutate marginal returns within different activities, aiming to assess whether households are able to allocate labor so as to maximize their incomes, and what factors determine if they do. The findings indicate that specialization in agriculture is not correlated with household welfare, and that agricultural wage work is a last resort option, as agricultural wage laborers also allocate labor to their own farms to such an extent that marginal returns in own farming become lower than among others. Furthermore, wage rates are much higher than the agricultural shadow wages, implying that there are gains to be made from expanding the non-farm side of the rural economy. However, there is no evidence that households are stuck in agriculture due to being constrained from entering the existing labor market. While I do not find preferences for own crops being important for labor allocation to farming, work preferences seem to play a role. There is also some evidence that both credit and social networks are important determinants of a household's probability of being stuck in low-return agriculture.