Estimating household responses to price reforms: trade, agricultural income and labor supply in Mexico

Abstract

Economic reforms involving the agricultural sector, such as those being proposed in the WTO Doha Round negotiations, will affect household behavior in developing countries. This paper proposes an empirical methodology to assess the impacts of agricultural price reforms on household outcomes like consumption patterns, sources of income, labor supply, health outcomes, and educational decisions. The method uses an empirical model of demand to extract price information from unit values, and uses this information to estimate the response of households to price changes and price reforms. By correcting unit values for quality effects, the method overcomes the endogeneity and measurement error problems of using unit values as regressors. The methodology is applied to study the responses of household agricultural labor income and labor supply in rural Mexico. I find that higher prices of corn and fruits and vegetables, key goods produced in rural Mexico, significantly increase the agricultural wage income of rural Mexican households. Instead, corn prices do not seem to affect the labor market decision of young adults. It is shown that using unit values instead of prices may lead to inconsistent results, and that the corrections suggested in this paper may be empirically important.