Vietnam-Netherlands Master in Development Economics (MDE) Program

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Introduction

Employment is currently an important problem in Vietnam. Despite high growth rate in manufacturing sector, the amount of additional labour hired is limited. In agriculture sector, the situation is not better. That is because other key factors of production such as land and capital are limited. There are about 10 million rural people who are semi-unemployed while more than 1.3 million workers added into labour force annually (General Statistic Office (GSO),1998).

There is 80 percent of the population in Vietnam living in rural areas. It is impossible to achieve sustainable economic development if most residents do not gain from economic growth. Improving living standards of rural population must be the first priorities of the government. On the other hand, many economists argue that low economic growth rates in recent years have been caused by low aggregate demand. In order to promote growth, the government should raise the demand in rural areas.

For the above reasons, the government has adopted measures to generate employment in rural areas. The measures include rural industrialization, promotion of traditional industries, agricultural diversification toward high – value crops and livestock, labour employment expansion of farm household sector. While other measures currently contribute little to employment generation, farm household sector has been paid a lot of attention.

Since the promulgation of the Land Law in 1993, commercial farms have been developing rapidly. Commercial farms have been established in all provinces. There are many kinds of farms: annual crops, perennial crops, livestock, and aquaculture. According to Ministry of Agriculture and Rural Development (MARD) in 1998, there are about 113,000 farms in Vietnam. Farm household sector plays an important role in rural economy. It is expected that the expansion of farm size will increase the income of farmers, create many jobs, raise the turnover of agricultural product and contribute to agricultural growth (MARD, 1999).

Factors affecting the amount of labour hired are still controversial among economists. In Vietnam, although the widening of commercial farms have attracted a lot of attention of researchers, there are a few study about labour in commercial farm. A study of commercial farms in the South only mention about features of labour in commercial farms (T.M.Sam, 2000). In 1999, a study of commercial farm by Huong based on a survey of National Economic University showed that the per capital income of commercial farmers was above the national average (N.D.Huong, 1999). However, in term of labour, the study only reveal the number of labour in each kind of commercial farms. Another study which has been conducted by International Food Policy Research Institute (IFPRI) in 2000 gives some interesting results. Commercial farms can make barren land productive and mobilize unused investment funds to increase agricultural production and marketed surplus. On the other hand, the widening of farm size will cause inequality in rural areas. In addition, the allocation of land in large parcels could employ less capital than the allocation in small parcels (Minot and Goletti, 2000). An MA thesis carried out by Canh about commercial farms in Binh Duong provinces focuses on determinants of income and productivity of commercial farms (L.Q.Canh, 2001). Unfortunately, the above studies have paid little attention to farm employment. Whether the widening of commercial farms have generate employment in rural areas has no clear answer. Therefore, the objective of the thesis is to reveal the relation between widening of commercial farms and employment in rural areas.

The study will focus on the central question “What is capacity of creating employment when expanding farm size?”

Based on the relevant literatures and data, the thesis briefly reviews theoretical models about employment in commercial farms. Debates about the inverse relation between employment and farm size are raised in this thesis. To see the effect of factors on employment in commercial farms, the tabular analysis is used. In the next step, the thesis focuses on quantitative methodology by using econometric techniques ordinary least square (OLS). Moreover, the thesis tries to explain the results of econometric models by basing on theoretical models and data sources.

The thesis includes 4 chapters. Chapter 1 provides an analytical framework for farm and rural employment. Chapter 2 introduces an overview of farm size and rural employment in Vietnam. Chapter 3 provides empirical results and analysis of determinants of labour input in commercial farms. Finally, chapter 4 is devoted to some main findings and discussions on policy implications and limitations of the thesis as well.

Chapter 1. Theoretical framework for farm and rural employment

1. Concept of commercial farm

All farms in the world can be classified based on the degree of commercialization. Commercial farms are usually referred to farms having the rate of output sold over 50 percent. Commercial farms can be divided into two groups: family farms and non-family farms. Family farms are the farms having the proportion of family labour higher than 50 percent. Otherwise, it is a non-family farm (Nakajima, 1965).

Family farms can be described more specifically. There are two levels of family farms. First, purely family farms are the farms having the proportion of family labour to total labour input over 95 percent. Second, intermediate family farms are the farms where the family provides from 50 percent to 95 percent of total labour input. In addition, non-family farms are one in which the family accounts for less than 50 percent of the total labour input (Hill,1993).

2. Concept of farm size and scale

There is confusion between farm size and farm scale. The problem is more serious when the concept of farm size is not homogeneous. In fact, there are two broad definitions of farm size.

On the one hand, farm size is defined as the area size of farm. It is the physical quantity of land available for production. On the other hand, farm size is defined as economic size of a farm. It is the total volume of resources used in production measured by gross farm output or by the quantity of capital (both fixed and working).

In this thesis, the term "farm size" is used to refer only to the area size of farm. The term "farm scale" is used to describe the overall economic size of farm. Therefore, an increase in farm size is an increase in the area size of farm. An increase in farm scale is an increase in all resources in farm.

Two terms relating to the concepts of farm size and farm scale is intensive and extensive cultivation. The most common use of these terms is to refer to the quantity of other resources that are combined with a given amount of land. A small ratio of area size of farm to quantities of other resources is defined as intensive cultivation. Meanwhile, if this ratio is large enough, it is defined as extensive cultivation. For example, two commercial farms have equivalent farm scale but different farm sizes. The commercial farms which have a smaller size and a larger amount of other inputs of production is considered to conduct intensive cultivation. Other farm is of extensive cultivation.

3. Basic theory of determinant of labour input in commercial farm

Nakajima (1965) has set up a model about commercial farm. His simple model is the model of the pure commercial family farm with competitive labour market. The model bases on two main assumptions: (1) output is marketable and all output is sold; (2); labour is also marketable: a part of farm labour can be hired in, and a part of the family labour can be hired out.

The equation for the family farm income will be:

M = P F(L, L_A) + W (L_F - L) (1)

Where

L : labour input of the farm, whether it comes from the family itself or from outside the family.

L_F : the amount of family labour utilized whether family labour work for the farm or not.

W : a given wage rate

L_A : farm size (the area size of farm)

F(L,L_A) : production function of the farm with two factors: labour and land

P : price of output.

M : money income from the family.

The objective of family farm is to maximize its utility U. Factors affecting family's utility are the amount of family labours L_F and the money income of family M.

U = U (L_F, M) (2)

Nakajima assumed that the higher the amount of family labour L_F, the less leisure time the family had and therefore the lower the utility: U _LF = ¶U/¶ L_F < 0, the higher the amount of income M, the higher the utility: U_M = ¶U/¶M > 0.

Family farms maximize utility function U (2) subject to equation (1):

¶F

P = W (3)

¶ L

- U_LF

= W (4)

U_M

¶F - U_LF

P = (5)

¶ L U_M

The equilibrium is depicted in Figure 1.a, 1. b, 1. c and 1.d. Condition (3) is satisfied at point at which the production possibility curve L₁ touches a point Q at which the production possibility curve touches the wage line CQR in figure 1.a and 1.b. Let the value of L in equilibrium be denoted by L₀. The income of family farm is:

Figure 1: Quantity of labour

It is clear that a point of the most designable combination of A and M will be on the line CQR in figure 1.a and 1.b. That is the point of equilibrium with respect to the amount of family labour utilized. A is the point at which the family income curve CQR in Figure 1.a or CRQ in Figure 1.b touches an indifference curve U

According to this model, the amount of labour input L and family labour L_F is affected by various factors. Nakajima developed his model by examining the behavior of family farm under the following conditions: (a) increasing price for farm output; (b) changing in farm size; (c) changing in family size; (d) rising in wage rate; (e) increasing in capital (f) the use of purchased input, say fertilizer; (g) multi-product enterprises. If there is a change in one factor, it is assumed that other factors hold constant.

The results are summarized as follow:

Table 1: Summary of Results of model

		Consequential variation in
Given	Autonomous variation	L_F	L	L- L_F	M
L_A, K, N, W	P increases	?	+	?	+
K, N, W, P	L_A increases	?	+	?	+
L_A , K, P, W	N increases	+	Cons	-	+
L_A , K, N, P	W increases	?	-	?	?
L_A , K, N, P	K increases	?	?	?	?

Where:

L_A Land area Cons : Constant

K: Capital + : Increases

N: Number of family members - : Decreases

P: Prices ? : Uncertain

According to empirical evidence, factors affecting labour input are Regionality, cropping intensity and cropping pattern.

4. Relationship between farm size and labour input per acre

Since land is limited, the common concern is that what the relationship between farm size and labour input per acre is. In rural area of developing countries, the fact is labour market is not perfect. In addition, the quality of labour is not the same.

Most theoretical and empirical studies reveal that farm size affects labour per acre. Other things hold constant, the higher the farm size, the less labour per acre. There are many explanations for the inverse relation. In all cases, it is admitted that the higher the farm size, the higher proportion of hired labour to total labour. Therefore, most of the explanations based on the differences between hired labour and family labour. This explanation consists of the following proportions.

Proposition 1

Family labour is worth more than hired labour. The inverse relationship results from the fact that small farms are characterized by high proportion of family labour and therefore, small farms have better quality labour input than the large farm. Since the quality of labour of small farm is better, they have an advantage of labour productivity. This is hypothesis in term of qualitative factor difference, which relates to incentive structure.

Proposition 2

Small farmers confront different factor prices from larger farmers due to imperfection in factor markets (Bardhan, 1973; Griffin, 1974). The explanation of different wage rates mostly bases on labour market dualism advanced by Sen. Dualism emphasizes the way labour enters production in family labour versus hired labour farms.

Some economists suspect about the explanation of the inverse relationship between farm size and labour input per acre based on the differences between hired labour and family labour. Some analyses about the relationship between labour use and proportion of hired labour have been conducted. The result is that labour input per farm, labour input per acre and output per acre show no meaningful pattern against the proportion of hired labour to total labour. Statistic test of labour input per acre against the proportion of family labour in hired farms implies no significant variation in labour input per acre across type of farm. Indeed, labour input per farm and output per acre are both less for the pure family based farm than pure hired labour based farm. Thus there is no systematic dependence of labour input per acre or output per acre on labour composition, and therefore average output per labour does not vary across labour composition (Pudze and Bandapadhyaya 1973).

Chapter 2. Farm and rural employment in Vietnam

1. Overview of agricultural sector

In rural areas, the role of agriculture is more important. Despite the rapid growth of industry and service in recent years, agriculture is still the main source of income for most people in rural areas. The farm sector absorbs 77 percent of total labour force in rural areas and the rest of rural labourers works in non-farm sector. There are about 30 million labourers working in farm sector (Ministry of Labour, Invalid and Social Affair (MOLISA),2000). It is obvious that the growth of agricultural sector will benefit immediately the huge amount of labourers and their families who live on farm.

"Doi moi" process initiated in 1986 remarked a turning point on the development of Vietnam's economy. In this process, a lot of innovations were carried out. In agricultural sector alone, innovation steps are: the promulgation of Resolution No 10 of the Polibureau (April 1988) about innovation of agricultural economic management; the Resolution No 22 of Polibureau (November 1989) and Decision No 72 of the government about the socio-economic development of mountainous areas (March 1990), socio-economic development strategy 1991-2000, Land Law (1993), Labour Code (1994) and other legal documents. Major features of the reform in agriculture are:

· To recognize farming households as basis economic units in rural areas.

· To give right of labour and long-term right of land usage to farm households.

· To establish input and factor markets and to allow farmers to buy inputs

· To transform agriculture from subsistence to commercial production.

· To remove trade barriers in domestic market

The above institutional innovation has met the need of the vast majority of rural households. It created a huge incentive for agriculture and rural economy to develop in the past decade.

However, the agricultural sector in Vietnam is still backward. High levels of rural poverty and food insecurity persist, particularly in remote upland areas. Indeed, it is striking that 90 percent of the families classified as living below the poverty line live in rural area. (UN, 1998)

2. Characteristics of rural labour

The annual growth rate of labour force is about 3.4 percent. That means there is about additional 1 million labourers joining into labour force every year. In 1999, the number of labourers is 38.64 million (MOLISA 2000).

Meanwhile, the production factors are limited. Like other developing countries, Vietnam is lack of capital. Although most of population lives in farm, the total cultivation land area in 2000 is only 9345 thousand ha. Land area per head is only 0.158 ha/person, far less than the sustainable level (MARD, 2001).

It is hard to state that high quantity of labour is an incentive for agriculture development. Although the literacy rate is fair, the quality of labour is very low. Most of labour is unskilled. The proportion of skilled labour in rural areas in 2000 is only 12 percent. Low quality of labour, in turn, has created barrier to an increase in demand for labour.

The high increase in labour force and low increase in demand for labour are the main reasons for labour surplus. According to MOLISA, the unemployment and underemployment is very high in the whole country and rural areas. It is estimated that the proportion of working time in the total time available for work in rural areas is only 70-75 percent.

One of the most concern of the government is the labour productivity in rural areas. The productivity of rural labourers who live in farm is much less than the productivity of labourers who work in industry and service sector (Table 2). Low productivity in rural areas is a characteristic of a developing country.

Reasons for low productivity are following.

Firstly, low productivity is caused by high amount of labour concentrated in rural areas. As above mentioned, most of them work in farm sector. The paradox is that while labour input is increasing, other factors of production such as land and capital are limited. Despite high quantity of labour, the output remains low.

Secondly, the labour market is less developed. The quantity of labour input is not determined by the wage rate. In other word, the wage rate is not an opportunity cost of using labour. In the area where there is a high unemployment and underemployment, it is not easy to find a full time job. For employers, asymmetric information is the main problem. They do not know exactly whether their workers satisfy with their requirement or not. In addition, the government legal regulation may cause a barrier to hire labour. Therefore, a best strategy is to work in their farm. An addition labour will reduce the average income of all farm labour.

Table 2: Employment and Labour Productivity, 1997-2000

	1997	1998	1999	2000
Agriculture
Output^(a)	55895	57866	60895	63353
Employment^(b)	22589380	23017634	22863056	22669907
Labour productivity^(c)	2474	2514	2663	2795
Industry
Output^(a)	75474	81764	88047	96916
Employment^(b)	4169560	4049239	4434809	4743705
Labour productivity^(c)	18101	20192	19854	20430

Source: Author’s calculation from GSO (2001); (a): billion dong at the constant price 1994; (b): people; (c) thousand dong/ per head/ per year.

Thirdly, agriculture is vulnerable. The natural condition is the main determinants of output. Prices of farm products is not stable. For some products, the prices tend to fall.

Because of low productivity of labour in farm sector and most people in rural area live in farm, the income of rural residents is very low. The annual average income in rural areas is only 2.463 million dong compared with 1,011 million dongs in cities. Income of a large section of rural people only meet subsistent needs. The saving rate in rural area is too low. This is the reason why the capital in rural area is scare and only a small part of people has ability of running commercial farm. VLSS 97-98 shows that there are 45 percent of rural people living below the poverty line while only 9 percent of urban residents living in the poverty line in 1998 (PWG, 1999).

3. Establishment of commercial farms in Vietnam

Commercial farms have been established rapidly since the promulgation of the Land Law in 1993. According to the law, farm household is allowed to transfer land, rent land from the local governments, state farms or rent land from private farmers.

Although the number of commercial farms increases rapidly, the establishment of commercial farms is not homogenous among regions because of differences in land, population, income, production structure, and infrastructure.

In Northern Uplands and North Central Coast, commercial farms have been set up fairly rapidly because of favorable natural factors. These are the regions of low population density. Cultivating and forestry land area is fairly high. Especially, there are a lot of land area which is not exploited and a lot of ball hills. Quality of land and climate are suitable for livestock and perennial crops such as tea, orchard, forest. The number of commercial farms is high because the local government granted land use right to farmers. In addition, many workers signed contracts with their state farms to use land. However, theses are the poorest regions in Vietnam. Market oriented economy is less developed and infrastructure is very poor.

In Red River Delta, total cultivating land area is small and almost all of land is issued the use right. High population and low opportunity of finding a job make farmers not to be willing to transfer their land. Therefore, the establishment of commercial farms takes place slowly and the farm size is not large. Land in larger commercial farms often comes from uncultivated land, river sides, land along the coastal land , or under submerged land. However, this is also a region which have many advantages. Labour in the region is available. Infrastructure is developed. Residents in this region have a lot of experience in cultivating annual crops. Therefore, most of commercial farms in this region are annual crops farms or livestock.

In Mekong River Delta, the cultivating land area per head is as high as three time that in Red River Delta. Residents in this region are acquainted with business. The land transfer among farm households takes place rather easily, which allows commercial farms expand farm size and employ machines in agricultural production.

South Central Coast has a little land for cultivating. However, with the characteristic of many water land, this is the region which is suitable for the development of aquaculture farms.

Central Highland and South East region have the most favorable conditions to establish commercial farms. The land fund is large and suitable for growing perennial crops such as rubber, coffee and forestry. South East is the richest region in Vietnam. The farm size in the two regions is fairly large.

Chapter 3. Determinants of labour input in commercial farms

1 Description of data and model specification

The study uses data from National Economics University's survey of commercial farms in 1999. The survey is conducted in 15 provinces across the nation. The provinces locate in all 7 geographical regions: Northern Upland, Red River Delta, North Central Coast, Central Highland, South Central Coast, South East, Mekong River Delta. Data collected in the survey include: (1) characteristics of the owners of commercial farms, (2) characteristics of commercial farms; (3) total land area and sources of land; (4) sources and usage of assets; (5) income and expenditure of commercial farms. These samples are of very good quality..

The amount of employment in commercial farms is affected by both demand for and supply of labour. However, amount of employment is affected by the demand side more than the supply side. Most variables in the models result from the demand side. The effect of the supply side on the amount of labour is presented partly through region dummy variables.

The model is:

Ln(labourha) = b₀ + b₁ * Ln(land) + b₂ * Ln(capital) + b₃ * Ln(wage) + b₄ * Northern Upland + b₅ * North Central Coast + b₆ * Central Highland + b₇ * South Central Coast + b₈ * South East + b₉ * Mekong River Delta + b₁₀ * annual crops + b₁₁ * livestock + b₁₂ * aquaculture + b₁₃ * ethnic minority + b₁₄ * low education + b₁₅ * farmer + b₁₆ * market restriction

Where:

labourha	the amount of labour per ha ( working days per ha)
land	the area of land of a commercial farm (ha.)
capital	the amount of capital invested in a commercial farm (million dong)
wage	the average daily wage per hired labourer (thousand dong)
fsize	the number of members of family owning commercial farm (members)
region	dummy variables reflecting 7 geographical regions in Vietnam. Therefore, there are 6 dummy variables reflecting geographical regions in the two models. We assume that the control variable of region is Red River Delta. 6 dummy regional variables are: Northern Uplands, North Central Coast, Central Highlands, South Central Coast, East South, Mekong River Delta
categories	dummy variables reflecting 4 categories of main farms’ product . Therefore, there are 3 dummy variables of categories in the two models. We assume that the control variable is for farms raising perennial crops. 3 dummy variables are: annual, livestock, aquaculture
ethnic minority	dummy variable
low education	dummy variable
farmer	dummy variable
Market restriction	dummy variable

2. Determinants of employment in commercial farms

The estimated results of the model are presented in Table 3. The hypothesis that all coefficients equal to zero is rejected because the F value testing the significance of all coefficients is 582.526 much higher than the critical value. The coefficients of the models are thereby reliable

Table 3: Estimation results of the model of the determinants of labour per ha

Independent variables

Coefficients

Standard error

t value

Significance

( Constant)

2.538

.056

45.634

.000

Log of farm size

-0.864

.011

-78.752

.000

Log of capital

0.208

.013

16.453

.000

Log of wage

-0.156

.040

-3.883

.000

Log of family size

0.436

.023

18.761

.000

Northern Upland

-0.117

.020

-6.089

.000

North Central Coast

-0.060

.019

-2.944

.003

Central Highland

-0.082

.021

-4.008

.000

South Central Coast

-0.179

.027

-6.602

.000

East South

-0.105

.020

-5.335

.000

Mekong River Delta

-0.044

.025

-1.811

.070

annual crops

0.072

.012

5.760

.000

livestock

0.040

.019

1.967

.049

aquaculture

0.055

.014

4.102

.000

ethnic minority

-0.027

.010

-2.656

.008

low education

-0.014

.007

-1.880

.060

farmer

0.011

.007

1.558

.119

Market restriction

0.015

0.08

-1.794

.073

R square

            .775

Adjusted R Square

            .774

Dependent variable

            Log of labour per ha

Source: author’s estimation from NEU's commercial farm survey in 1999

2.1 Effect of farm size

The model shows that farm size has a great significant effect on the amount of labour per ha. If farm size increases by 1 percent, the amount of labour per ha reduces by 0.864 percent on average. That is a strong evidences that there is an inverse relationship between farm size and amount of labour per ha. The inverse relationship appears in most categories of farm size.

The effect of developing commercial farms on rural employment depends on the fund of land. If the expansion of commercial farms is accompanied by an increase in fund of agricultural land, the total amount of labour will raise. As the fund of agricultural land is not likely to increase, it is clearly that the expansion of commercial farms appears will not to contribute to generation employment in rural areas.

The small increase in the amount of labour and the reduction in amount of labour per ha as farm size rises can be explained partly by “cheap labour based explanation”. It means that rural labour market in Vietnam is imperfect due to the difference between family labour and hired labour.

In rural areas, small farms tend to employ labour intensively and the proportion of family labour is very high. The objectives of small commercial farms are not only maximizing returns to capital but also improving efficiency of other resources including family labour. While the opportunity of finding a job in rural area is small, it is better to employ family labour in commercial farms. This argument can be showed in Table 4.

Although small commercial farms employ labour intensively, it does not mean that labour in small commercial is not efficient. In commercial farms of which farm size less than 3 ha, the productivity of labour is 81.14, much higher than the figure in larger size commercial farms. The argument that in small size commercial farms, marginal productivity of labour is nearly zero is rejected.

Table 4: Farm size and proportion of family labour to total labour

		Proportion of family labour to total labour (percent)	Average labour per ha (working day)	Ratio of labour to capital (working day/ million dongs)	Productivity of labour (thousand VND/working day)
Farm size (ha)	<=3	77.22	886.84.	12.31	81.14
	3à3.6	70.36	438.49	12.42	59.42
	3.6à5	69.94	366.91	12.97	57.23
	5à8.2	66.82	275.06	12.10	51.92
	>=8.2	54.37	146.89	11.92	45.28

Source: Author’s calculation from NEU’s survey about commercial farms in 1999

Table 4 also shows that as farm size raises, the proportion of family labour to total labour and the productivity of labour reduce while ratio of labour to capital is nearly unchanged. The explanation that family labour is more quality than hired labour seems to be true in this case. The objectives of family labour are consistent with the objectives of the owner of commercial farm. In opposite, the target of hired labour is to gain wage. For amount of work, wage earners may not work hard because they want to be hired for more time.

The efficiency of family labour in small farm can also be expressed in Table 5.

Table 5: Proportion of family labour to total labour

		Average labour per ha (working day/ha)	Average capital per ha (million dongs/ha)	Productivity of land (million dongs per ha)
Proportion of family	<=42.6	504.76	107.60	38.81
labour to total labour	42.6à64.3	455.63	88.05	34.20
(percent)	64.3à81.8	365.87	64.60	24.28
	81.8à94.7	361.96	56.62	21.13
	>=94.7	622.28	80.92	88.76

Source: author’s calculation from NEU’s survey about commercial farms in 1999

Table 5 shows another interesting results. As proportion of family labour is higher than 94.7, the productivity of land is 88.76. It reduces strongly to only 21.13 as the proportion is from 81.8 to 94.7 percent although the production’s input of the latter account around 60 percent of production’s input of the former. It can be explained that to make hired labourers work hander, the owner of commercial farm may require family members to supervise hired labourers; therefore, the efficient of labour reduces. However, the sharply reduction in the productivity of labour shows that family labour is not always efficient. The quality of family labour is high when the proportion of family labour is nearly 100 percent or farm size is very small. As proportion of family labour falls or farm size goes up, the quality of family labour reduces sharply. That is because of bow line’s form of labour’s supply. As income is low, the supply of labour increases when the cost of labour increase. The supply of labour increases until the income increase to a given high level, it will reduce as income increase. In this case, as farm size is small, the commercial farms has to employ family labour intensively. Since the welfare of family members is low, the family labour have to work hard and hesitate to hire more labour. The quality of family labour is very high and more efficient than hired labour. However, in commercial farms having higher farm size, the standard of living of family labour is high enough. They do not want to work hard but hire labour. Since family labour still accounts for a considerable proportion to total labour and do not want to work hard, the productivity of labour in this type of commercial farm reduces sharply. Although hire labour may be more efficient than family labour, the owners of commercial farm do not desire to cut down family labour and replace it by hired labour. That is one of reasons why the growth rate of amount of labour is smaller as farm size increase.

2.2 Effect of capital

The model in table 3 shows that capital is an importance determinant of amount of labour. The coefficient of capital is positive and significant at the level of 0.05. The coefficient is 0.208 implying that an 1 percent increase in capital leads to 0.208 percent increase in amount of labour per ha. Capital falls into two kinds of fixed assets and current assets. In general, the increase in capital equipment will have the positive effect on the amount of labour for the following reasons. The first and the most important reason is that the increase capital equipment will raise the output of commercial farm. The productivity of labour, therefore, will increase. Given other factor hold constant, the owner will employ more labour until the productivity of labour equals the wage rate. Secondly, the increase in investment will allow the owner to raise scale and diversify production. The demand for labour per ha obviously increases.

When analyzing the positive effect of capital on amount of labour, it is impossible not to mention the role of working capital. Current asset will make the process of production much better.

2.3 Effect of family size

If the number of family members increases by 1 percent, the amount of labour per ha increases by 0.436 percent. The change in family size may result from the change in the number of family members in working age or the number of dependent members. In general, the higher the family size, the higher the expenditure in a commercial farm. If the additional member is dependent one, each family labourer has a pressure to earn more money. Their working time will be longer. If the additional member is in working age, he may find off-farm job. In this case, the amount of labour in farm does not increase. Therefore, the result can be explained by the fact that it is not easy for family member to find off-farm job. In addition, family labour and hired labour can not be perfectly replaceable.

2.4 Effect of wage

Other things hold constant, 1 percent increase in wage rate will make the amount of labour per ha reduces 0.156 percent. An increase in wage rate will make the wage higher than productivity of labour. The owner will cut down hired labour until the wage equals the productivity of labour. If there are no hired labour or the remain hired labour is irreplaceable, the owner will encourage family members to find off-farm employment. Since more than 50 percent of labour are family labour on average and it is not easy for family members to find off-farm job, the effect of wage rate on the amount of labour is not very strong.

2.5 Regionality effect

In the regression model, Red River Delta is chosen as the control variable because it has highest population density nationwide. Other things hold constant, the owner of Red River Delta employs the highest amount of labour per ha. More specifically, the amount of labour per ha in Northern Upland, North Central Coast, Central Highland, South Central Coast, East South and Mekong River Delta is 11.7, 6.0, 8.2, 17.9, 10.5, 4.4 percent less than that in Red River Delta, respectively. It seems that in regions which have low cultivated land per head, the amount of labour tends to be higher than that in the regions of higher cultivated land per ha. In the region of low cultivated per head and high population density, the ability of hiring labour is easy. In addition, the difference in natural condition in each region may have effect on the demand for labour. Such natural conditions will determine the productivity of commercial farms. In general, each region may have an advantage of natural condition. If the types of output produced by commercial farms suitable with the natural condition, the efficiency of commercial farm in the region tends to higher than that in the region, which does not use comparative advantages.

2.6 Effect of main’s product of commercial farm

The model also confirms that the amount of labour per ha is affected by main’s products of commercial farm. The category of perennial crop is chosen as the control variable because it is the most popular categories of commercial farm. Other things hold constant, the amount of labour per ha in annual crop, livestock and aquaculture are 7.2, 4.0 and 5.5 higher than that in perennial crop. Annual crops such as rice and sugarcane still employ the highest amount of labour. That is because of the characteristic of each category. The annual plants require good care, especially in harvesting season, whereas, the perennial plants require less care. However, livestock, aquaculture and perennial crop give higher income than annual crop.

2.7 Other effects

The demand for labour depends on the ethnic of the owner of commercial farm. According to the model, it is hard to reject the hypothesis that there is a difference in the behavior between King ethnic and ethnic minority. Other things hold constant, the ethnic minority tend to employ 2.7 percent labour less than the Kinh ethnic. Although the difference is not very large, it is an evidence that the Kinh ethnic is more acquainted with market economy than the ethnic minority. In addition, the Kinh ethnic has advantages in approaching information which in turn affects the productivity of commercial farms. This can be explained by obstacle of language and the relationship in each community of ethnic.

Another factor affecting the behavior of the owner of commercial farm in employing labour is his level of education. Owners of commercial farms who only attended primary education tend to employ 1.4 percent of labour per ha less than those who have higher level of education. Those who have high level of education will know how to use labour more efficiency than those having lower one will. Other things do not change, the productivity of labour in commercial farms whose owner has higher level of education will higher than that of owner having less education. This is the reason why the owners, which have low education, tend to hire less than those having higher level of education. It is also explained by the fact that the high education owners feel self- confident in managing a large amount of labour.

Chapter 4. Conclusion and policy recommendation

1. Conclusion

Underemployment in rural areas is quite high. The two targets that the government has to achieve is to increase the income of rural residents and to create additional employment. In this context, commercial farms have arisen. It is obvious that the development of commercial farms will benefit the owner of commercial farm as well as his family members. The government considers effects of the development of commercial farm on the rest on rural residents. The most important is the capacity of generating employment.

The OLS model has been employed in the research to determine the determinants of labour in commercial farms. Empirical results have suggested the following main findings.

v The main finding is that the farm size and labour input per ha has a negative correlation. The capacity of generating employment when expanding farm size is not much. Small commercial farms employ labour intensively and there is no evidence that labour in these commercial farms is not efficient. As farm size increases, the proportion of hired labour increases while the amount of family labour nearly unchanged. What is worth noting is that the family labour is much more efficient than hire labour as farm size is small (less than 3 ha) and proportion of family labour is high. As farm size rises and proportion of family labour reduces, the family labour is less quality. That is the main reason for the low productivity of labour and the low growth rate of labour in large size commercial farms.

v Another important finding is that capital has an important role in generating employment. An 1 percent increase in capital will lead to 0.21 percent increase in total labour and 0.651 percent increase in hired labour. The results also confirm that the large farms tend to use more capital than small ones. Therefore, if the capital hold constant, the capacity of generating employment is significant if the owner of commercial farm increases farm size as well as capital at the same time.

v The wage rate has a negative effect on total labour. While it has little effect on family labour, the effect on labour is significant.

v In addition to wage rate, capital and farm size, family size has a strong effect on labour. Although family size has a positive effect on total labour, it has a negative effect on hired labour.

v Geographical location of farm size may influent the amount of labour. The research shows that the Red Rive Delta seems to employ the highest amount of labour as well as hired labour. Meanwhile, the Northern Uplands, South Central Coast tend to use the least amount of labour.

v Another finding with regard the main farm’s products. What is noticeable is that annual crop farms employ the highest amount of labour. Meanwhile, the perennial crop farms employ the lowest amount of labour.

2. Policy implication

v In the region of high population density, the government should be carefully in allowing expanding farm size. In this region, most land area is exploited and cultivated. Employment may be reduced if land is transferred from farmer to farmer and there is no more capital invested. The negative effect may not happen if the people who live in farm have off-farm employment to replace. The expansion of farm should be encouraged when off-farm employment develops strongly. It should be encouraged in the region of low population density and there are a lot of unexplored land.

v To boost the positive effect of commercial farms, the government should create favorable condition for the owners of commercial farms to raise capital. In order to raise owner’s capital, a set of measures should be established to raise income of the owner and minimize risk. In addition, the government should encourage banking system to lend owners of commercial farms.

v The government should encourage the expansion of commercial farms if the owners commit to invest a large amount of capital.

v Policy makers should have a measure of developing the relevant structure of plants, livestock and aquaculture. It is necessary to identify the structure of commercial farms which tend to bring the highest return to the owners of farms.

v The government should encourage strategy of commercial farms which use labour intensively. In the regions of high population density and high semi-unemployment, small commercial farms should account for high proportion. In the region where farmers can cultivate annual and perennial crops, the government should encourage farmers to cultivate annual crops if the earnings’ gap is insignificant.

3. Limitations and further research

The topic of employment in commercial farms in Vietnam is a hard topic. It is impossible to avoid limitations. That is the problem of data. The target of NEU’s survey in 1999 is to have the overall broad picture of commercial farms in Vietnam. It is not the survey that the main target is to study about employment in commercial farms. Therefore, the survey can not provide necessary information to study employment. In addition, because it is cross section data, it is very hard to measure the effect of price of products on employment in commercial farms.

Because of the limitation, the study must proceed further. A new study must be based on more data detailed on employment and other factors associated with farm activities. The survey must provide information about price of product, more information about situation of employment in rural areas such as total rural employment in the region in the process of expanding commercial farms. In order to estimate the effect of expansion of commercial farms on rural employment. it is necessary to conduct another survey that collect cross- section and time series data about rural employment not only in commercial farms but also in all sections in the process of development of commercial farms.

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