Does Nonfarm Economy Offer Pathways for Upward Mobility? Evidence from a Panel Data Study in Ethiopia

Abstract

Several empirical studies across developing countries document a positive correlation between participation in rural nonfarm employment and households’ wealth or income status. However, the direction of causality is far from obvious. This paper explores whether nonfarm employment leads to higher consumption expenditure growth in Ethiopia. We find that; 1) Households’ consumption expenditure growth is positively correlated with the initial share of nonfarm income. 2) The growth elasticity of nonfarm income share is higher for wealthier households; and 3) the source of growth for nonfarm participants lies in the higher rates of return participants enjoy on their human and physical capital.

Keywords: rural nonfarm, income dynamics, income diversification, Africa, Ethiopia, impact