The purpose of this paper is to identify the determinants of China’s rural households’ non-farm participation. The authors pay special attention to the effect of potential income differential on this participation.
The data used in this study come from a household survey conducted in Hubei Province. The authors estimate participation equation and income equation, respectively, then introduce potential income differential simulated in participation equation to examine its effect on non-farm participation.
Potential income differential serves as the major pull factor that favors non-farm participation. Education, proximity to a city and specialized commercial farming are crucial in helping rural households to participate in non-farm production; while the land shortage or the labor surplus act as the push factor in non-farm participation. Better quality of land reduces the household’s propensity to participate in non-farm activities. Moreover, the income gap between households that participate in non-farm activities and pure farmers is mainly determined by the differences in household characteristics.
The authors use the method of “switching regression and structural probit” to examine the impact of potential income differential on non-farm participation, and simulate the response of the participation probability to the change of potential income differential. The authors also analyze the sources of income gap between non-farm and farm households using Oaxaca decomposition.
