Empirical studies across many developing countries routinely document a positive correlation between participation in rural nonfarm employment and households’ wealth or income.
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 main source of growth for nonfarm participants comes from the higher rates of return participants enjoy on their human and physical capital.
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