Under the shadow
Research conducted by Teagasc and the University of Galway has estimated the economic value – or shadow wage – of farm family labour on Irish dairy farms, highlighting the critical role of agricultural education in increasing its value.
Agriculture, a cornerstone of the Irish economy, is at something of a crossroads as it strives to achieve sustainability and food security goals amid emerging challenges in a changing policy environment. One such challenge is the currently constrained nature of the labour market. This is putting pressure on dairy farms because of the limited supply of, and uneven demand for, labour throughout the year due to the seasonality of production and the spring-calving system.
This challenging situation highlights the necessity of family labour in ensuring the continued viability and resilience of farms.
New research by Teagasc and the University of Galway is helping to improve understanding of the interdependence between family and hired labour supply and demand. It reveals the fundamental importance of formal agricultural education in increasing the economic value of family labour.
Meeting labour needs on family farms
Across the Irish dairy sector, the expansion in milk production since the end of the EU quota in 2015 has been facilitated by both increased labour input and the adoption of new labour-saving technologies on farms.
Additional labour requirements on family farms have been met by both family and hired labour. Challenges in sourcing labour, and the seasonal nature of labour demand, require effective labour management strategies in combining family and hired labour where needed.
This new research explores the value of farm family labour and the extent to which it can be substituted with hired labour if available through the estimation of a shadow wage for family labour.
Calculating the shadow wage
The study by Teagasc and the University of Galway estimates the shadow wage of family labour on Irish dairy farms using data from the National Farm Survey (NFS), which operates as part of the EU Farm Accountancy Data Network (FADN).
In the NFS, in line with FADN methodology, farm family labour is technically referred to as being unpaid with the return to labour accounted for in the definition of Farm Family Income (FFI).
Emma Dillon, Senior Research Officer at Teagasc, explains: “To obtain the shadow wage measure, we use a concept from economics called a production function. This assumes that the amount of farm output – milk and calves, for instance – depends on several factors: capital – money and equipment; labour – paid and unpaid hours; land; and other miscellaneous inputs. Each of these factors contributes a certain percentage to the total value of farm output, which is referred to as the production coefficient.”
The focus of the study was on investigating the unpaid labour element of production.
“To do this,” Emma continues, “we determine how much each hour of unpaid family labour adds to the value of farm output. This calculated value is known as the shadow wage of labour.”
Results of the study
Using data from 2019, the research suggests that the average shadow wage of farm family labour (including for the main operator) was €30.97 per hour.
It was observed that, as farm size increases, so does the shadow wage. For smaller farms (<43 cows), which represent the first quartile (the 25% smallest farms), the shadow wage is €12.17, and for larger farms (>86 cows), which represent the third quartile (the 25% largest farms), the shadow wage is €43.94.
The relatively lower shadow wage highlights the additional challenges that small farms may face in terms of financial viability given the relatively poorer return compared to larger farms.
In addition, the findings indicate that agricultural education influences the value of the shadow wage. The average shadow wage of farmers with formal agricultural education is almost twice that of those without, at €34 and €19 respectively. Consequently, the return of agricultural education on shadow wages is approximately €15 per hour.
Figure1. Shadow wage of family labour and agricultural education level. Note: A further 3% of farmers did not specify the formal agricultural education they had undertaken and are thus not included in these categories.
Furthermore, Figure 1 illustrates that the returns to family labour increase as the level of agricultural education increases. Our research therefore highlights the role of the level of agricultural education in enhancing farm viability as those farm operators who have undertaken formal agricultural training report higher levels of farm income.
Increase in demand for hired labour
In recent years, there has been a significant increase in the proportion of hired labour on Irish dairy farms following the abolition of milk quotas in 2015.
Luis Garcia-Covarrubias, a Postdoctoral Research Associate at University of Galway, says: “This policy change allowed farms to expand their operations, and that resulted in a heightened demand for labour beyond family resources. As dairy herd sizes grew, the reliance on hired labour increased on some farms to meet the higher operational demands.
“Our findings suggest that this shift has been due to the economic concept of shadow wages, which in turn influences the decision-making process regarding the employment of additional labour.”
Specifically, as shadow wages increase, so too does the demand for hired labour, indicating that, on average, family and hired labour act as substitutes on Irish dairy farms. This substitution effect is more pronounced for casual hired labour compared to permanent hired labour.
Fiona Thorne, Teagasc Principal Research Officer, says: “The substitution of family labour with hired labour allows farmers and their family members to dedicate more time to other management operations on the farm, enhancing overall farm efficiency. During vacation periods or over less intensive months, casual hired labour can take over, ensuring the continuity of farm operations without overburdening family members.”
This strategic labour allocation not only optimises resource use, but also supports better work-life balance for farming families, which may lead to improved farm management and productivity.
“This insight makes intuitive sense given the demand for casual labour is highest during the peak workload period in the spring,” Fiona continues. “The presence of such labour then allows the farmer to occupy a more managerial role or even perform some off-farm work if needed.
“With the substitution effect being less pronounced for more permanent labour, farmers can thus allocate tasks to those workers more similar to the ones previously performed by family labour.”
Impact on policy
The research findings have important implications for policymaking. Dairy farmers are navigating significant changes, being required to meet the ambitious sector targets identified in the Irish Climate Action Plan 2024 and the EU Climate Target Plan 2030.
“This research highlights the contribution of agricultural education,” says Emma, “particularly in the context of the rapid technological and sustainability challenges affecting the dairy sector. Our findings support the idea that policies to increase formal agricultural education for farmers are essential for the farms’ viability and the industry’s future.”
In Ireland, several policy tools aim to modernise and promote the viability of the dairy sector. However, these programmes require a minimum level of formal agricultural education to qualify. For instance, the CAP Strategic Plan contains a targeted scheme for younger farmers. The scheme focuses on supporting generational renewal in agriculture through financial support. To apply to the scheme, it is a requirement for the farmer to complete a recognised agricultural education course equivalent to the Further Education and Training Awards Council Level 6. Therefore, the team recommends the continued support, through policy incentives, for agricultural education.
Similarly, an improved understanding of the supply and demand dynamics between family and hired labour can help inform more effective labour management strategies, and policies to support farmers, essential for the long-term viability of the dairy sector. Initiatives that incentivise and attract workers to employment opportunities in the agricultural sector should be supported.
In addition, smaller farms – and those not traditionally using or requiring hired labour – may need financial and logistical support to hire labour. Targeted policies to support smaller farms to hire extra labour during busy seasons, especially in the first few months of the year, would be beneficial – especially for those farms with an aging operator profile where there may be workload challenges.
This effort would help smaller farms meet peak labour demands and ensure their continued viability in the dairy industry.
The findings of this research provide a compelling direction for future research in this area, particularly in the context of supporting the long-term sustainability and intergenerational transfer of farms.
Shadow wage and FFI
A shadow wage is the hypothetical or implicit wage rate that reflects the value of labour provided by individuals not formally compensated for their work. It is the economic value of unpaid labour, such as household work, family labour on farms or voluntary work in community organisations. Specifically, the concept of shadow wages arises because these unpaid types of labour do not have a market-determined wage rate. As a result, economists use shadow wages to assign an economic value to this unpaid labour, allowing for more accurate assessments of economic activity and welfare.
Farm Family Income (FFI) is defined as gross output less total net expenses and represents the total return to family labour, management and capital investment in the farm business.
Acknowledgements
The authors are grateful to the staff of the National Farm Survey involved in the collection and validation of the data, and the farmers who voluntarily participated in the survey. This outreach article comes from an academic paper currently under peer review. We are grateful for our co-authors’ contribution to the academic paper, including Doris Läpple from the University of Göttingen and Edgar Tellez-Foster from the University of California Riverside, USA. The research was made possible due to funding gratefully received through the Teagasc Walsh Scholarship Programme.
Contributors
Luis Garcia-Covarrubias, Postdoctoral Research Associate, J.E. Cairnes School of Business and Economics, University of Galway.
Emma Dillon, Senior Research Officer, Agricultural Economics and Farm Surveys Department, Teagasc Athenry. emma.dillon@teagasc.ie
Fiona Thorne, Principal Research Officer, Agricultural Economics and Farm Surveys Department, Teagasc Ashtown.
This article was first published in TResearch