91

Pakistan Economic and Social Review

Volume 49, No. 1 (Summer 2011), pp. 91-108

FACTORS DETERMINING RURAL

LABOUR SUPPLY: A MICRO ANALYSIS
MUHAMMAD ZAHIR FARIDI and A. B. BASIT*

Abstract. Rural development is the heart of the country’s economic development.

Rural development is attained by providing employment opportunities to rural
labour force. The aim of the present study is to explore the factors which decide
about rural labour market participation. Primary source of data is used for
analysis which is gathered by the authors. Binomial Logit regression method is
employed to estimate the determinants of rural labour supply model. Findings
indicate that Education, Economic Capital Index, and Social Capital Index have
discernible impact on rural labour supply. In addition, it is observed that number
of livestock and size of land holdings have negative and significant impact on
rural labour force participation. The study has suggested that rural infrastructure
should be developed and educational facilities should be improved.

I. INTRODUCTION
Pakistan is basically an agricultural country and agriculture is the biggest
sector of the Pakistan’s economy. Almost 66 percent of the Pakistan’s
population is residing in rural areas of Pakistan. Agriculture is the main
source of their livelihood. One fourth of Pakistan GDP is being contributed
by agriculture sector. Labour force participation rate is vital indicator of
supply of labour. Labour market behavior is assessed by labour force
participation rate. Out of total labour force, 43.61 percent work force is
employed by agricultural sector.1 In addition, this sector regularly supplies
workers to the manufacturing sector. Rural development is the heart of
country’s economic development. It is not only sufficient to raise the

*The authors are, respectively, Lecturer at Department of Economics, Bahauddin Zakariya

University, Multan (Pakistan), and Associate Professor of Economics at the Islamia
University, Bahawalpur (Pakistan).
1
See Pakistan Economic Survey (2008-09).
92 Pakistan Economic and Social Review

agriculture productivity but it is necessary to provide employment

opportunities to rising rural population by enhancing their incomes. Further
rural development takes place by providing with necessary facilities like
better houses, paved streets, health and education services, improved socio
economic infrastructure. In nutshell, the socio economic condition of rural
people may be uplifted by attaining the goals of increased productivity,
employment opportunities and income redistribution.
Despite the above discussed importance of rural and agriculture sector,
there is still a large portion of rural labour force which remains unemployed
and under employed in rural areas. The main purpose of the present study is
to explore the factors which directly or indirectly influence the rural labour
force participation.
The rest of the analysis is planned as follows: The section II reviews the
important studies on labour force participation both at national and
international levels. Theoretical framework regarding labour market
participation is provided in the section III. In the section IV, we have
developed labour supply model and estimation method. Sources of data and
interpretation of variables are described in the section V. The section VI
discusses the results of study. The last section offers concluding remarks of
the study in section VII.

II. STUDIES REVIEWED ON LABOUR MARKET

PARTICIPATION
There is an immense of studies granting to debate on labour market
conditions in rural or agriculture areas available both in the developed and
developing economies. Some of the important studies are reviewed at the
national and international level. There are some studies which illustrate the
emergence of rural labour markets functioning and collapse of institutional
impediments while other empirical findings support the hypothesis that there
still exist imperfections in the labour markets.
Benjamin and Brandt (1997) and Liu et al. (1998) identified that there is
negative relationship between the size of farm and labour force participation,
showing labour market barriers.
Meng (2000) and Yang and Zhoou (1998) explored that off farm labour
force participation was discouraged by institutional obstacles or barriers like
land tenure systems and perceptive quota system.
Naud and Serumage-Zake (2001) provided the estimates of the labour
market participation and unemployment in South Africa’s North West
 FARIDI and BASIT: Factors Determining Rural Labour Supply 93

province. The determinants were estimated using probit model. They used
data collected from three sources like the 1993 Caldru Survey, the 1995 CSS
Survey and survey conducted by the authors in 1997. The analysis found that
education, location, sex and family structure were significant factors of
unemployment. The study concluded that the unemployment was a severe
challenge in rural areas of South Africa.
Renkow (2003) estimated labour market model at the county level for
North Carolina. He used the county level data considering the years 1980 and
1990. Three stage least square (3SLS) method employed for empirical
analysis. The findings showed that changes in real wages and housing prices
seemed to be more vital factors of adjustment in labour market in metro
counties than in rural counties. In addition, labour force growth was
significantly influenced by the changes in employment in nearly counties.
Bowlus and Sicular (2003) and Wang et al. (2007) showed that there
existed non-divisibility between labour demand and supply decisions of farm
workers and thus imperfections in the labour markets.
Maurer-Fazio (1999) and Li et al. (2005) reported that the off farm
labour markets would be functioning well because the returns of off farm
labour were almost equal over many alternative employment opportunities
and off farm incomes were significantly determined by education.
Kimhi (2004) discussed the role and importance of agriculture sector in
the development of rural areas. The study used data on rural semi-coopera-
tive villages. The data collected from four sources. Census of Population in
Israel was the main source of data for the study. OLS technique was used for
estimation analysis. The study concluded that the impact of importance of
agriculture or rural development was mixed.
Mduma and Wobest (2005) analyzed the factors that affect the rural
labour force participation. The study used the data from Household Budget
Survey (HBS) in Tanzania in the year 2000-01. Truncated regression and
negative binomial regression techniques were employed for estimation. The
findings of the study indicated that level of education, land availability,
access to economic centers and credit turned out to be the most crucial
factors in determining the rural labour force participation and the share of the
labour income in total cash income.
Glauben et al. (2008) contributed to the continued discussion over
Chinese labour force participation in rural labour market during the last
twenty years. They used the household data from the Zhejiang province
during the period 1986-2002. Multinomial Logit technique was used to
94 Pakistan Economic and Social Review

analyze empirically household, farm and regional characteristics influencing

the probability of the farmers’ participation in any one labour market
regimes. The results of the study indicated that rural employment was
significantly affected. The findings showed that the education turned out to
be the crucial factor for labour market participation.
There is a rich body of empirical studies scrutinizing the determinants
influencing the labour force participation decisions both rural and urban in
Pakistan. For example, Afzal and Nasir (1987), Ali (1990), Ghayur (1993),
Jamil (2001), Hafeez and Ahmed (2002), Naqvi and Shahnaz (2002), Faridi
et al. (2009, 2010), Azid et al. (2001) analyzed the determinants of labour
force participation considering the some socio-economic and demographic
factors. But only few studies concentrate on rural labour market
participation. The present study is focused especially on the factors effecting
rural labour supply.

III. THEORETICAL FRAMEWORK

The economic theory underlying labour supply is reviewed briefly. We start
by examining the individual’s participation. The present study employs a
standard participation model based on traditional theoretical household
models of time allocation (Mincer, 1962; Becker, 1965; Gronau, 1977;
Blundell and McCurdy, 1999; Hafeez and Ahmed, 2002). In the literature of
labour supply, different dimensions of the life cycle models have been
prepared and examined2. The present study uses the standard static, within
period labour supply model which is based on the basic theory of consumer
behavior. The individual is assumed to allocate time to market work and non-
marketable activities (leisure). Utility is maximized by choosing
combinations of goods and leisure hours subject to time, price and income
constraints. Formally, the model may be presented as follows:
U = F (G, L, Z) (1)
Where U shows the utility, G = consumption of goods and L stands for
leisure hours. Similarly Z indicates individuals and household characteristics
such as age, education, marital status, number of dependents, family setup,
spouse participation in economic activities etc. For examining the rural
labour characteristics, the number of livestock, size of land holding,

2
See Rozenz Weig (1976); Ben-Porath (1973); Willis (1973); for example, the use of one
period static life cycle models and Rozens Weig and Wolpin (1980); Sprague (1988);
Troske and Voicu (2009); for formulation and application of rural multi-period life cycles
models.
 FARIDI and BASIT: Factors Determining Rural Labour Supply 95

economic and social over head capital are incorporated in the vector of
individual and household attributes Z. So it is assumed that utility is
maximized subject to the income and time constraint.
PgG + WL = V + WT (2)
Where W is the constant wage rate, Pg = Unit price of goods, V = Non-labour
income and T is the total time available. The individual maximizes a utility
function subject to the limitation of fixed time “T”. Further, the individual
decides how to allocate his or her time to inside home activities, outside
home or market activities and leisure. Thus, the optimal time allocation to
market activities would be determined by the individual and household
characteristics. The costs of a job search and remunerations of the market
work are determined by the labour market conditions.
More formally, the individual solves his or her maximization problem
by optimizing U = F (G, L, Z) subject to budget constraint PgG =
W (T – L) + V. The first order conditions are the solution of this optimization
problem.
FG (G, L, Z) = λ FL (G, L, Z) ≥ λW (3)
Where λ shows the marginal utility of income. On the one hand, the equation
(3) indicates the demand function of the commodities which produce utility
and on the other hand it involves the optimal allocation of time among
leisure hours and market work. If there is the existence of strict inequality in
the equation (3), then the individual is not participating in labour market. It
means that leisure hours are equal to total time, i.e. L = T. The concept of
reservation wage ( W& ) underlies the labour force participation decision. The
wage rate W& , such that FL (G, L, Z) = λW& , is the reservation wage below
which the individual would not be willing to work. So, the individual would
participate in the labour market if and only if the expected market wage is
more than the reservation wage, i.e. We > W& .

IV. LABOUR SUPPLY MODEL AND ESTIMATION METHOD

We have considered those rural workers in the labour force who are
participating in market work as paid, unpaid or self employed worker. For
estimating our rural labour supply model, we would perform a multivariate
regression analysis. The general function for rural labour supply model is
given as follows;
Yi = f (X1, X2, ……, Xn) (4)
96 Pakistan Economic and Social Review

Where Yi shows rural labour market participation, Y = 1, if a rural work force

involves in business and economic activities and Y = 0, if rural work force
does not work. X1, X2, ……, Xn show various socio-economics factors. The
dependent variable in our model is binary or qualitative in nature. So linear
probability model (LPM) is not sufficient for estimating rural labour supply
model. In the present analysis, the non linear probability model (Logit) is the
most appealing which generally involves non linear maximum likelihood
estimation. The Logit model assumes the following cumulative probability
density function:
1
P= − (α 0 +α i X i )
(5)
1+ e
Where ‘P’ is the probability that an individual worker supplies its services to
the rural labour market, ‘e’ is the exponential value. α i is the row vector of
the parameters and Xi is the column vector of the variables.
Since ‘P’ is the probability of rural labour force participation in the
economic and business activities which is not directly observable, a latent
(0, 1) variable is formulated who decides to participate in the labour market
and zero otherwise. The following regression equation is derived directly
from the logistic probability equation (5).
⎡ P ⎤
ln ⎢ = α0 + αi X i + εi (6)
⎣1 − P ⎥⎦
This equation indicates the Logit model. The parameters of our model
are not conveniently/ easily explained because they provide only information
on the effects of independent variables (Xi) on the odd ratio. We calculate the
partial derivatives to interpret the effect of independent variables on the
probability of rural labour force participation. The probability derivatives are
calculated as (Greene, 2004):
∂P
= Pˆi (1 − Pˆi )α i (7)
∂X i
After a comprehensive discussion of theoretical framework and
estimation technique, the theory permits to develop a standard but very
simple rural labour supply model which formulates the rural worker’s
decision to join labour market as a function of its educational attainment,
rural related factors (i.e. Number of livestock, size of land holdings), role of
rural infrastructure.
 FARIDI and BASIT: Factors Determining Rural Labour Supply 97

RLS = α 0 + ∑ γ j EDC ji + ∑ α k RRFki + ∑η t RI ti + Z i λ + ε i

j k t

Where RLS indicates rural labour supply which is equal to “1” for i the
worker is in the rural labour force and zero otherwise. On the right hand side
of the equation, the basic variables of interest are educational attainment
(EDCji), rural related factors (RRF). Similarly rural infrastructure (RI) is
considered very important factor in determining rural labour force
participation. The vector Zi consists on extra information probably effecting
labour force participation just like age and number of dependents, family set
up and marital status, sex and spouse’s participation etc.

V. DATA SOURCES AND DESCRIPTIONS OF

THE VARIABLES
This section provides the sources and description of data and also interprets
the major characteristics of the variables that are related to the econometric
analysis.

SOURCES OF DATA
In order to analyze the factors which influence the rural labour force
participation in economic activities, we have selected district Bahawalpur,
which is the least developed district of the southern Punjab. The main source
of the data for the present study is Primary data, collected through field
survey, using simple random sampling technique. Almost three hundred and
twenty six rural workers (both male and female) in the age cohort 15-64 are
interviewed for the present study.

STATEMENT OF HYPOTHESIS
The unit of analysis is rural worker. After reviewing the important studies,
we have hypothesized that educational attainment is positively related to the
rural labour supply. As far concerned the rural related factors (i.e. number of
livestock and size of land holdings) it is hypothesized that these factors
reduce the off farm labour force participation. In addition, to observe the
effect of social and economic capital over head on rural labour supply, we
have developed Social Capital Index (SCI) and Economic Capital Index
(ECI). It is expected that there is positive relationship between SCI and ECI
and rural labour force participation. Further, study incorporates some
additional variables like age, number of dependents, spouse’s participation,
family set up and marital states to influence the rural labour supply.
98 Pakistan Economic and Social Review

The detailed list of these variables is given in Table 1.

TABLE 1
List of Some Selected Variables
Variables Description of the variables
Dependent variable
RLS Rural labour = 1 if rural worker participates in the labour market
supply = 0 Otherwise
Explanatory variables
AGE Age of the Completed years of age are taken
worker
ECY Education Completed years of education are considered
level of
worker
PEC Primary level = 1 if worker education is up to primary
of education = 0 Otherwise
SEC Secondary = 1 if worker education level is secondary
level of = 0 Otherwise
education
HEC Higher level = 1 if worker education level is graduation and post
of education graduation.
= 0 Otherwise
MAR Marital Status = 1 if the worker is married
= 0 Otherwise
NLS Number of Total number of livestock is considered because it is
livestock difficult to give economic value of the livestock due
to instable livestock market.
SLH Size of land Total size of land holdings in acres
holdings
NDT Number of Total number of dependents below 15 years and
dependents above 64 years
ECI Economic Economic capital index indicates the presence of
Capital one or more of the followings such as:
Index3 (i) Market centre or utility stores
(ii) Village Bank
(iii) Animal health centre or Veterinary clinic
(iv) Agriculture counseling center, i.e.
(0 ≤ ECI ≤ 1)

3
We owe these indices to Datt and Jolliffe (1999).
 FARIDI and BASIT: Factors Determining Rural Labour Supply 99

SCI Social capital Social capital index shows the presence of one or
index4 more of the following public service such as
(i) Police station
(ii) Education facilities up to secondary level
(iii) Public hospital or health facilities
(iv) Post Office, i.e. (0 ≤ SCI ≤ 1)
FSP Family setup = 1 if the worker belongs to joint family
= 0 Otherwise
SEX Gender = 1 if the worker is male
= 0 Otherwise
SPT Spouse = 1 if the spouse is working
participation = 0 Otherwise
in Economic
activities

VI. RESULTS AND DISCUSSION

PRELIMINARY ANALYSIS
Preliminary analysis of the data is made through explaining the descriptive
statistics of the some selected variables and by providing the pair-wise
correlation matrix among relevant explanatory variables.

Descriptive Statistics
Table 2 interprets the means and standard deviations of some selected
variables for the chosen sample of rural labour supply. The mean age of the
rural worker is 39.81 year with standard deviation 13.76. The average
education of the rural labour force is 10.31 years with 3.98 dispersion. The
proportion of rural workers with primary education is 32 percent while the
proportion of the secondary level educated worker is 39 percent. Overall 74
percent workers are married. On the average, rural workers hold 9.18
numbers of livestock. The mean size of land holdings is 11.67 acres with
variation 12.16. In order to examine the shape of distribution, the values of
coefficient of Skewness and Kurtosis of each variable are also given in Table
2.

4
See Assaad et al. (2000).
100 Pakistan Economic and Social Review

TABLE 2
Descriptive Statistics of Some Selected Variables
Standard
Variables Mean Skewness Kurtosis
Deviation
RLS 0.69 0.46 –0.84 1.70
AGE 39.81 13.76 0.02 2.00
ECY 10.31 3.98 –0.53 2.91
PEC 0.32 0.45 0.97 1.94
SEC 0.39 0.49 0.47 1.22
HEC 0.29 0.46 0.90 1.81
MAR 0.74 0.44 –1.11 2.23
NLS 9.18 9.05 1.36 6.38
SLH 11.67 12.16 1.08 3.36
NDT 4.83 1.92 0.11 2.19
ECI 0.65 0.26 –0.42 2.51
SCI 0.67 0.27 –0.57 2.64
FSP 0.57 0.50 –0.29 1.08
SEX 0.67 0.47 –0.75 1.56
SPT 0.41 0.49 0.36 1.13
Source: Calculated by the authors using E-Views 5 Statistical Software.

Correlation Analysis
The pair wise correlation among different explanatory variables is reported
in Table 3. To examine the existence of multicollinearity among the
independent variables, we get aid from this correlation matrix. The
explanatory variables, whose pair wise correlation is greater or equal to 0.83,
indicate the existence of high multicollinearity (Gujarati, 1995). Then the
multicollinear variables are dropped in the econometric analysis. From Table
3, it is clear that there is no existence of multicollinearity among the
repressor variables; albeit, there is some degree of relationship between the
variables.
FARIDI and BASIT: Factors Determining Rural Labour Supply 101
102 Pakistan Economic and Social Review

ECONOMETRIC ANALYSIS
The results of the Logistic estimates of the determinants of rural labour
supply model are reported in Tables 4 and 5. The major difference between
these two equations is that the equation (4) uses completed year of education
as an explanatory variable and the equation (5) provides the results of the
various educational levels. Two-tailed test of significance is used in the
present study to examine the reliability of the point estimates. For this
purpose, one percent, five percent, or ten percent levels of significance are
used. The intercept terms in both equations of rural labour supply model are
negative and insignificant. The quality of our estimates may be examined by
the moderate value of McFadden R2 (0.53). In addition, overall performance
of rural labour supply model is gauged by LR-Statistic which is highly
significant.
Age of the rural worker turns out to be positive and statistically
insignificant factor in both equations. Rural labour force is more likely to
participate in economic activities due to an increase of one year in worker’s
age. Education is another factor which has a significant effect on rural labour
force participation. We have used completed years of education as an
explanatory variable in our first Logit equation of rural labour supply model.
The coefficient of education (ECY) is positive and highly significant. An
additional year of education raises rural labour supply by 3.15 percentage
points. In equation (2) of rural labour supply model, we have introduced
three dummies representing various educational levels. Non-formal
education is considered as base category. All the coefficients of educational
levels are positive and have significant impact on labour supply except
primary level of education. Higher educated rural workers are 48.6
percentage points more likely to participate in off farm labour market. Our
results are consistent with Glauben et al. (2008), Kimhi (1994), Zhang et al.
(2003)’s findings.
The study has pointed out that marital status of the worker performs an
integral role in determining the rural labour supply. The coefficients of
marital status (MAR) in both equations are positive and statistically
significant. The rural workers are more likely to participate in labour market
by 28 percentage points due to one unit increase in MAR. In order to trace
out the influence of agricultural assets on rural labour market participation,
the study incorporates number of livestock and size of land holdings as an
explanatory variable. The coefficients of number of livestock and size of
land holdings are negative and statistically significant at one percent level of
significance. The probability of rural workers’ participation falls by 1.66 in
off farm activities and 2.51 percentage points due to an addition of one unit
 FARIDI and BASIT: Factors Determining Rural Labour Supply 103

in livestock (NLS) and size of land holdings (SLH) respectively. The reason
may be that the livestock and land holdings are the major source of rural
income and have a depressing impact on off farm employment. The
estimation results stay in line with Glauben et al. (2008)’s findings which
emphasize on the importance of rural assets.
TABLE 4
Binomial Logit Estimates of Rural Labour Supply Model
(with Completed Years of Education)
Prob.
Variables Coefficients Z-Statistic
Derivatives
Constant –1.028 –0.93 –
AGE 0.013 0.71 0.0028
ECY 0.148* 2.64 0.0315
MAR 1.321*** 1.69 0.2809
NLS –0.078* –2.96 –0.0166
SLH –0.118* –5.32 –0.0251
NDT 0.322* 2.53 0.0685
ECI 0.216*** 1.78 0.0459
SCI 0.528** 2.13 0.1123
FSP 0.181 1.08 0.0385
SEX 0.505 1.22 0.1074
SPT –1.355* –2.36 –0.2882
Log Likelihood –94.57801 McFadden R2 0.53
LR Statistic (11 df) 212.7852 Size of Sample 326
Probability (LR Stat) 0.0000
Source: Estimated by authors using E-Views 5.0 Statistical Software.
* Significant at 1 percent level
** Significant at 5 percent level
*** Significant at 10 percent level
Note: Illiterate is taken as base outcome.
104 Pakistan Economic and Social Review

TABLE 5
Binomial Logit Estimates of Rural Labour Supply Model
(with Various Levels of Education)
Variables Coefficients Z-Statistic Prob. Derivatives
Constant –1.124 –0.83 –
AGE 0.011 0.94 0.0023
PEC 0.946 1.06 0.2012
SEC 1.234** 1.98 0.2625
HEC 2.285* 2.46 0.4860
MAR 1.309*** 1.66 0.2784
NLS –0.071* –2.73 –0.0151
SLH –0.114* –5.15 –0.0243
NDT 0.373* 2.94 0.0793
ECI 0.225*** 1.65 0.0479
SCI 0.672** 1.98 0.1429
FSP 0.053 1.19 0.0113
SEX 0.431 1.06 0.092
SPT –1.335* –2.28 –0.284
Log Likelihood –94.62296 McFadden R2 0.52
LR Statistic (11 df) 212.6953 Size of Sample 326
Probability (LR Stat) 0.0000
Source: Estimated by authors using E-Views 5.0 Statistical Software.
* Significant at 1 percent level
** Significant at 5 percent level
*** Significant at 10 percent level

We have observed that the number of dependents has positive and

significant impact on rural labour force participation. The rural workers are
more likely to join the labour market by about 7 percentage and 8 percentage
points in both equations of rural labour supply model as a result of an
increase of one dependent in the family. The present study indicates that
social overhead capital plays a pivotal role in raising rural employment. The
coefficients of ECI and SCI are positive and statistically significant. The
rural labour supply increases by about 4.6 and 4.8 percentage points in both
Logistic equations respectively as a result of an improvement in ECI. The
significant result indicates that the presence of market center, village bank,
animal health centre and agricultural counseling centre raise more
 FARIDI and BASIT: Factors Determining Rural Labour Supply 105

employment opportunities in rural areas. Supporting to the previous result,

the SCI also influences positively the rural labour force participation. The
SCI raises probability of rural labour force participation by about 11.2
percent and 14.3 percent in both equations of the rural labour supply model
respectively. Labour force participation is highly influenced by family set up.
The study shows that rural workers are more likely to participate in the
labour market belonging to joint family system but have insignificant impact
on rural market participation. Similarly, the probability of rural male worker
increases by 10.74 percentage points due to one unit increase in male labour
force. Spouse participation in economic activities (SPT) reduces the
probability of rural labour market participation by about 28 percentages. The
coefficient of SPT is not only negative but highly significant at one percent
level of significance.

VI. CONCLUSIONS
The rural labour force participation both on farm and off farm activities is
regarded very important for rural development. The present research has
explored various human and non-human factors for determining the rural
labour supply. We have observed from the present analysis that Education
turns out to be very significant factor in determining rural labour supply. The
completed years of education and various educational levels have positive
and significant impact on rural supply of labour. The study concludes that
marital status; number of dependents and social overhead capital positively
affect the supply of labour in rural areas. Further, we have found that number
of livestock, size of land holdings and spouse’s participation in economic
activities significantly reduce the off farm labour force participation.
Based on the study’s findings, the following suggestions are
recommended.
1. Basic and higher education institutions should be established in
rural areas especially agricultural education.
2. Government should improve the rural infrastructure by providing
electricity, health facilities and also road infrastructure.
3. Security facilities should be provided through establishing police
stations in rural areas.
4. To expand the rural business activities, markets and business
centers might be developed in rural areas.
106 Pakistan Economic and Social Review

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