Rising cost of labor and transformations in grain production in China

Purpose: The purpose of this paper is to investigate Chinese farmers’ adaptation behavior in the context of the rising cost of labor in agriculture. As the cost of labor increases, farmers will either reallocate their budget to different inputs or change the structure of agricultural production to maximize profit. Design/methodology/approach: The Rural Fixed Point Observation data set between 2004 and 2010 is employed in the empirical analysis of this study. Both the compensated and uncompensated demand elasticities with respect to wages are estimated by adopting the translog cost function and the profit function. Findings: The results show that labor input will drop down significantly as a response to rising wages. Land, fertilizer and intermediate inputs are net complements of labor, whereas machinery appears to be net substitute for labor. In addition, the authors also separate the expansion effect from the substitution effect and find that farmers will shift to grain production with intensive use of fertilizer and from wheat and corn to rice as a response to the rising cost of labor. Originality/value: This study adopts the classical household model to incorporate various adaptation behaviors of farmers into one framework and decomposes the total effect of the rising cost of labor on input demand into an expansion effect and a substitution effect, which provides a better understanding of farmers’ adaptation behavior.