Human Capital, Productivity, and Labor Allocation in Rural Pakistan

This paper investigates how human capital affects the productivity of rural households in Pakistan. It is concerned mainly with the effects of education, but also considers complementary aspects of human capital such as nutrition, which is proxied in the study by height and body mass index.

The role of human capital in development has been the subject of much interest. Recent studies by growth theorists and economists have shown that the accumulation of human capital can sustain long-term growth, and there is little doubt that better-educated workers earn higher wages in the modern sector. Whether education raises farm productivity, however, is open to question. Some studies, particularly for Asia, have concluded that education has a positive effect on farm productivity and efficiency, but the evidence from Africa and Latin America is mixed. This paper contributes to the debate by jointly examining two issues that are usually treated separately in the development literature: (1) the direct effects of human capital on farm productivity; and (2) the indirect effects of human capital on farm productivity through decisions that households make about labor allocation, i.e., choices about whether to put education to use in farm or nonfarm work.

The Survey
The analysis was based on data from a 12-round household survey conducted by IFPRI in four districts of Pakistan between July 1986 and September 1989. Close to 1,000 randomly selected households in 44 randomly selected villages were interviewed at 3-to-4 month intervals on a variety of issues including incomes, agricultural activities, land, and livestock as well as education, anthropometrics, and other human capital variables. The human capital variables were measured as follows: experience proxied by age and age squared (to capture

One-fifth of the additional income garnered from improved education in rural Pakistan is achieved by reallocating labor away from the farm—mostly toward activities that are off-limits to women due to the restrictive purdah system.

life cycle effects); education measured in years of schooling (a formal investment in human capital); and innate ability measured by Raven's tests (widely used as a proxy for intelligence among illiterate adults in developing countries). In addition, health and nutrition were proxied by adult height (which captures the cumulative effects of childhood and adolescent nutrition as well as genetic endowments) and by body mass index (which predicts muscular mass and physical strength among populations of developing countries).

Responses to the survey questions were combined by the authors to generate a consistent data set containing annual information about household composition, income, assets, inherited land, human capital, and labor. The survey also tracked crop yields during the two growing seasons—rabi (the drier season) and kharif (the wetter).

Testing the Effects of Human Capital
The survey showed that in rural Pakistan, households of median size (8 people, 4 of whom are adults) own an average of eight acres of land and have highly varied sources of income: crop production (25 percent, on average); livestock raising (15 percent); nonfarm earned income (wages and self-employment income, 30 percent); and rental income and remittances (30 percent). Agricultural wage income was found to be negligible, possibly because wage earners were underrepresented in the sample.

The survey data were used in a two-stage analysis to test whether human capital raises productivity in any of the households' four income-producing activities: rabi farming, kharif farming, livestock raising, and nonfarm work. In the first stage, the authors estimated the effects of education and other human capital on productivity in the four activities. In the second, they examined how education and other human capital influence labor allocation among these activities.

Findings
The most important finding was that education has no significant effect on productivity in crop and livestock production. Education does, however, raise off-farm productivity and thus induces rural Pakistani households to shift labor resources from farm to off-farm activities. This effect is strong and robust. One additional year of schooling for adult males raises household income by 4.5 percent. One-fifth of this additional income is achieved by reallocating labor away from farming and toward nonfarm work—-mostly toward activities that are off-limits to women due to the restrictive purdah system. Purdah is therefore the major cause of low returns to female education.

Other dimensions of human capital were also shown to be important—especially height, as a proxy for nutrition, which raises productivity and labor effort in livestock production. These effects are again confined to male adults; no systematic and robust relationship was uncovered between female nutrition and market-oriented activities in rural Pakistan.

Policy Implications
These findings support the view that returns to education are likely to be seen outside of agriculture, and thus the government should encourage more nonfarm activities in the countryside so that households can increase income without relocating to cities. These include entrepreneurial activities such as trading and small machine shops. Government creation of new jobs in rural areas for women, such as teachers and primary health workers, can provide opportunities for educated women to realize returns to their human capital. Removing barriers to women's participation in economic activities would then encourage parents to invest further in girls' education and nutrition.

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