The goal of this study is to assess households’ labor allocation in the wake of China’s efforts to develop the rural labor market in a manner that is conductive to its transition to a market economy. Applying the agricultural household model as the theoretical framework, we help to understand the behavior of rural households in the labor market in three different but interrelated contexts: Participation behavior in hiring labor and supplying off-farm labor, the quantity of hired-labor demand and off-farm labor supply, and the dynamics of rural households’ participation in labor markets. The empirical studies are based on micro-level panel data from Zhejiang province from 1995 to 2002. We first derive a joint model of households’ decisions on hiring labor and supplying labor off the farm, with special attention of households that participate in both markets simultaneously. The main result suggests that the decisions to hire labor and supply off-farm labor are jointly made and positively correlated. This supports the hypothesis that rural China has a poorly functioning labor market. Next, we estimate a series of hired labor demand and off-farm labor supply functions using the wages of hired labor and off-farm workers as the instrumented variables. A household’s labor demand decreases with the increasing wage of hired labor, whereas the effect of off-farm worker’s wage on a household’s labor supply differs significantly depending on the household’s type of labor market participation. The wage paid for hired labor has statistically significant and negative effects on off-farm labor supply. This implies that the hired labor and off-farm labor are substitutes, albeit imperfect substitutes in rural China. Our analyses show that the expansion of livestock production has increasing effects on labor demand but reducing effects on a household’s off-farm labor supply for households that participate in both markets. Land market integration significantly enhances participation in the labor market but has no significant impact on time allocation. Furthermore, the results suggest non-separability between off-farm labor supply and household structure as well as social network, again confirming that the rural labor market in Zhejiang province is still functioning imperfectly. Finally, the panel data also allow us to evaluate the dynamics of households’ participation in labor market by applying discrete hazard models. In particular, we investigate the movements between participation and autarky in labor market, between part-time and full-time farming, and between hiring or not hiring labor. We intend to identify the factors that determine the duration for a household’s participation in the labor markets. Our results show that the histories of households that participate in labor markets and the likelihood of the households to move among the labor markets are significantly related to several household and farm characteristics, as well as features of local community.


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