Does the nonfarm economy offer pathways for upward mobility? Evidence from a panel data study in Ethiopia

Empirical studies across many developing countries routinely document a positive correlation between participation in rural nonfarm employment and households’ wealth or income. This paper explores whether nonfarm employment leads to higher consumption expenditure growth in Ethiopia. We find that: 1) households’ consumption expenditure growth is positively correlated with the initial share of nonfarm income; 2) the growth elasticity of nonfarm income share is higher for wealthier households; and 3) the main source of growth for nonfarm participants comes from the higher rates of return participants enjoy on their human and physical capital.