Effects of the Internal Wage Rate on Output Supply: A Structural Estimation for Japanese Rice Farmers

Abstract

Farmers are offered a higher wage rate by their off-farm employers than the rate of remuneration they receive for their labor on their own family farms in Japan. However, it is not possible for them to work for as many hours as they want for their off-farm employers at the offered wage rate. Hence, they perceive that they face an imperfectly competitive market for labor with only limited opportunities for wage employment (see, for example, Arayama, 1986; Kang and Maruyama, 1992). Markets for their output and factors of production are observed to be perfectly competitive. Thus, the state of the markets they face proves to be similar to the one producer-consumer households face in the circumstances addressed in section 2.2 of the preceding chapter. Since the market for labor is not a perfectly competitive one, because it offers only limited opportunities for wage employment, the market wage rate ceases to be relevant in organizing their family farms and in making their choice over their level of consumption. They are obliged to form an internal wage rate on their own for these purposes within their households. The analytical results in section 2.2 show that the internal wage rate proves to be lower than the market rate, and renders their supply of output and their demand for factors of production less elastic than in the instance in which all relevant markets are perfectly competitive. In extreme cases it gives rise to a downward-sloping supply function of output and upward-sloping demand functions for the factors of production.