Off-farm employment, informal insurance, and agricultural labor hiring in incomplete markets

: Rural households pursuing mixed livelihood strategies, continue to hire agricultural labor even when farming generates limited or negative returns. This paper explains this apparent anomaly as a household labor-portfolio choice in incomplete markets and limited formal social protection. Using micro-level data from the China Household Finance Survey, we examine how off-farm employment affects agricultural labor hiring among rural households. The results show that a higher share of household members engaged in off-farm employment significantly increases both the likelihood and intensity of agricultural labor hiring. Mechanism tests suggest that this relationship is driven by household farm-labor constraints, off-farm income risk, and the informal insurance role of agriculture. Consistent with this interpretation, formal pension participation weakens the relationship between off-farm employment and labor hiring. We further show that even though hired labor may reduce farm-level profitability, it allows households to reallocate family labor to off-farm activities generating higher-returns and household-level income outcomes. These findings suggest that the seemingly inefficient agricultural hiring strategy can be understood as a alternative household response to incomplete markets. The study has broader implications for rural labor markets, social protection, and structural transformation in developing economies.