The computation of income in RuLIS: what's in there and

what could be … in there

Federico PeraliUniversity of Verona

Expert ConsultationMethodology for an Information System on Rural Livelihoods and Sustainable

Development Goals Indicators on Smallholder Productivity and IncomeFAO – Rome

November 7, 2016

Feedback on theStructure of the Income Calculation

• Income indicators• On-farm income: crop, livestock, fishery, forestry, and …

gardening• Off-farm income:

• transfers (social and private) • non-agricultural family owned enterprise • wages and • other income

• Gender Related Income and Productivity Indicators

Income (… and Wealth?) Indicators• Agric. income (livestock, crop, fishery, forestry, ag wage), (%) total

(disposable) income • Gini coefficient for per capita expenditure• Concentration index (Herfindahl) of value of crop production • Concentration index (Herfindahl) by types of livestock

• Income diversification and resilience

• Urban / Rural Income per capita disparity, ratio• Non-agric. income including non-agric. wages, (%) total income • On-farm income (livestock, crop, fishery, forestry), (%) total income • Urban / Rural Per capita Expenditure disparity, ratio • Transfers (public and private) as a share of total income (%)

Gender related Income & Productivity Indicators

• Per capita daily income for female headed household • (current LCU) & PPP (current international $) fragility indicator?

• Per capita daily income for male headed household • (current LCU) & PPP (current international $)

• Value of production per hectare/year in female managed land, • (current LCU) & PPP (current international $)

• Value of production per hectare/year in male managed land,• (current LCU) & PPP (current international $)

• Value of production per hectare/year • (current LCU) & PPP (current international $)

My Reflections for Discussion

• The Gender Dimension in a Collective Framework:• who consumes/does what … in the family, in the farm?

• The Time Dimension: extended incomes• The Wealth Dimension: current incomes• The Productivity Conundrum• A Multidimensional (money metric) Indicator of

Economic Well-being

The Household-Enterprise Modelunderlying the Design of a Living Standard Survey

( ) ( )1

, ,N

x ij i i i i m fj

st p x w o pq rF w w y Yρ φ=

≤ + − + =∑

i i i il T h o f= − − −

( , , )i i iz x h dς=

( , , )j iq F f dξ=

Individual and household well-being

Full income

Non-mkt Home Production

Mkt farm production

Time constraint

WEALTH

The Gender (and Generational) Dimension• Collective approach

• The derivation of the incomes of individuals within households is challenging because reconstructing the incomes of household members, and their level of individual welfare, requires knowledge of individual utilities that are only derivable from the identification of the rules governing the intra-household allocation of resources.

• Construction of indexes relating the effective contribution of each member to the formation of full incomes

• Income statistics are usually computed without using knowledge about the intra-household allocation of goods and power and without giving special consideration to the fact that goods that are private at the aggregate household level are public within the household.

• This knowledge, though deducible, is usually constrained by the fact that in expenditure surveys only information at the household level is available.

• The neglect of intra-household inequality may have consequences for the measurement of society’s level of poverty and inequality

The Collective Approach: who does what?• The implementation of the collective approach to the analysis of the

household enterprise, permitting the recovery of individual behavior and welfare levels, requires the collection of information about the private and assignable consumption of goods and time use.

• This information is crucial when the policy analyst is interested in genderissues or generational issues such as the well-being of children.

• Important to keep track of “Who does what” • (e.g. how much time is spent on a field cultivating a specific crop using a specific

technology)

• Relevant to construct agricultural input/output matrices!• … and for the productivity conundrum

Recommendations to data systems for implementing a collective approach (Wye Group)

The questionnaire design should be specific on the assignable information: • Consumption Spending and Labor

• Clothing for male, female and children, toys, school material and other education expenses, baby food, personal care items, alcohol, tobacco.

• Individual specific time-use. • Off-farm work opportunities and wages.

• Income and Wealth • The sources of non-labor income should be assigned, when possible, to each

household member. • Production

• Who does what in the farm and in the household, distinguishing, when possible, the activities undertaken by the father, mother, children, other adult members of the household and hired labor.

Accounting for Time and Wealth

•To evaluate material welfare, the Fitoussi, Sen, and Stiglitz Commission proposes that• income, consumption of both goods and time, and wealth, rather than production, are evaluated jointly with the aim of broadening the measures traditionally used for family support including the evaluation of non-market activities.

Asset and Income Poverty

Extended and Current Incomes• The notion of extended income, that includes the value of

time invested in home production, is important to • understand differences in family organization and • describe how households respond to policy changes by reallocating

labor among farm, home, and off-farm opportunities.• The notion of current income, the sum of after direct tax

incomes and incomes from net worth (r NW), is important to • understand the “economic position” of an individual that also

depends on the flow of services • Net worth, obtained as total assets minus total liabilities, is an indicator of

“long-run economic security,” while liquid assets are an indicator of the ability to cope with unanticipated emergencies.

The Road to Full Income• Gross Household Income

• Income in kind• Disposable Household Income (net of taxes)• Extended Income

• disposable + value of time invested in hh production activities• Full Income

• add the value of leisure … (may be dangerous)• Current Income

• add the annuity value of the Net Worth (net of debts) of assets rxNW• (r = prevailing market interest rate, e.g. 0.05)

The Shadow Evaluation of Family Labor • In conventional accounting systems, “unpaid” family labor does not appear as

an explicit cost of production. So, no explicit “wage” paid to family labor• Three approaches

• Accounting: the value of family income can be obtained as a residual, subtracting from net income the remuneration of all other factors of production.

• Objective market wage under competitive conditions: evaluates an hour of household labor at the prevailing (competitive ?) market wage supposing that the farmer is indifferent between working in and off farm.

• Shadow wage: the family “unpaid” labor can be evaluated as the value of the marginal product of labor (corresponding to the subjective evaluation of the disutility associated with an extra hour of work). This approach requires the estimation of a production or cost function describing the farm technology.

• But, no individual shadow wages, … unless data are collected about who does what in the farm and at home.

The Productivity Conundrum• A gross exemplification

Y=f(hh,hw,hc,z)

• The marginal product/hour of the husband is the same for the wife and the child • This is a fundamental identification problem• Possible Solution

• Record who does what and how (e.g. using a tractor?), then the marginal products are individual specific

Yh = f(hh), Yw = f(hw), Yc = f(hc)

• Comment • how distant shadow wages are from objective market wages for hired labor? An interesting

indicator of the efficiency of rural labor markets

A Money Metric Multidimensional Indicator of Well-Being

• E-ISEE = The (Extended) Indicator of the Equivalent Economic Situation• It accounts for INCOME, ASSETS, TIME and HOUSEHOLDS DIFFERENCES

and SITUATIONS (disability, single parenthood, or unemployment)

(disposable income + r x Net Worth + Value of time in hh prod)--------------------------------------------------------------------------------------------

equivalence scales

• Best performer as a means testing tool as compared to Alkire and Foster’ counting approach

Thank you

for the attention …

and the invitation!