Labour Dynamics, Factor Substitution and Capital Adoption in Sub-Saharan African Agriculture

Abstract: Ongoing structural transformations in many Sub-Saharan African (SSA) economies are driving changes in labour inputs and wages, likely influencing smallholder agriculture and the direction of agricultural intensification processes. At the same time, the adoption of capital-intensive technologies still remains puzzlingly low. 

This article, therefore, explores how smallholder farmers in Ghana, Tanzania and Malawi adapt their mix of production factors in response to evolving regional wage conditions. In particular, we investigate the nature of the relationship between capital and labour regarding their substitutability, given that the types of available capital and prevailing farming systems in SSA mean that mechanisation still requires significant complementary labour. 

Using a multi-step method based on panel data, our results show that the elasticity of substitution between capital and labour is non-unitary, indicating they are gross complements. In line with these findings, our binary choice model reveals that higher wages are likely to impede capital investment in African agriculture. Our findings corroborate recent literature from other regions and suggest that growth in the off-farm economy could hinder the adoption of capital-intensive agricultural technologies in SSA.