Does Human Capital Raise Farm or Non-farm Earning More? New Insight from Rural Pakistan Panel Survey

This study explores how human capital affects farm household earnings using two tools to refine measurement of human capital effects. First, it employs a two-sector model to allow the allocation of family labor between farm and non-farm activities. Second, it accounts for village fixed effects to evaluate whether results from panel data differ meaningfully from a cross-sectional data analysis with local binary variables. The results show that education has a negligible effect on farm earnings; instead, experience appears to be the principal channel by which human capital affects agricultural performance in a traditional rural setting. Our results also suggest that prior models that fail to separate non-farm activities spuriously exaggerated the effect of education to the farm sector. In addition, typical cross-sectional analyses that ignore fixed effects may cause the effects of education on rural household earnings to be significantly overstated. The fact that panel data regressions accounting for village-level fixed effects found only one instance of education raising earnings the effect of literacy on non-farm income suggests that considerable heterogeneity may have been ignored in cross-sectional data analyses, especially ones that omitted village binary variables.