Decomposing household income differences between farmers and non‐farmers: Empirical evidence from Norway

Abstract Income comparisons between farm and non‐farm households play a crucial role in many aspects of farm policy. Using household income data from tax returns of all Norwegian taxpayers in the period 2006–2015 we study these income differences. We find that the unconditional mean income is higher for farm households, but with important differences depending on the comparison group considered. We also find that the income difference is reduced when we control for differences in the personal characteristics of the different non‐farm comparison sub‐groups. This finding implies that income comparison using unconditional means, as frequently done in agricultural policy making, is potentially misleading. We also show that the income effect of personal characteristics is not the same for different comparison sub‐groups, as has been assumed in previous studies of income disparities. Differences in personal characteristics, and the income effect of those characteristics, therefore need to be accounted for if income comparisons between farmers and non‐farmers are to inform farm support policies.