The Effect of Livelihood Diversification on Household Income: Evidence from Rural Ethiopia

Abstract

Rural farm households are facing shortage of farm land due to population density. This has adversely affected livelihood activities in agriculture leading to low income. To overcome these problems, people tend to diversify their livelihood to improve household’s income. However, the relationship between livelihood diversification and household income of the rural households requires empirical quantification in the study area. Therefore, the objective of this study is to assess the effects of livelihood diversification on the household income. The data were collected from rural Ethiopia individual farmers through personal interview using structured questionnaire. The data were obtained from 252 sample household heads that were selected through a combination of purposive and stratified random sampling techniques. The Composite Entropy Index (CEI) has been used for measuring livelihood diversification. Multiple regression model was applied to identify the determinant factors influencing the households’ level of livelihood diversification. Then 2SLS model was employed to detect the effects of CEI on household income. The results indicate that livelihood diversification has a positive and significant effect on household income at p < 0.0001. A 1.0% increase in livelihood diversification will lead to 3.9% increase in income signifying an elastic relationship. Owning higher number of livestock and larger size of farm land with better access to improved seed and family labor use helps rural households significantly improve their farm income in particular and household total income in general. Thus, the results of this study suggested that there is a need to develop a number of strategies to facilitate successful livelihood diversification and increase household income. This includes the development of rural infrastructure in terms of road connectivity, market, credit facility and input supply.

Keywords: Livelihood diversification, Composite Entropy Index, Two-Stage Least Square model, household income, farm households, Kembata Tambaro Zone, Ethiopia.