An Empirical Investigation of Short- and Long-run Agricultural Wage Formation in Ghana

This paper investigates the factors that influence real agricultural wage rates in Ghana, a critical issue in that country for promoting successful macroeconomic adjustment to structural changes in incentives. It is based on 1957-91 data. The Johansen cointegration framework is used to quantify and to examine the stability following major shocks of new long-run relationships among agricultural and urban wage rates, the domestic terms of trade between agriculture and non-agriculture, urban unemployment, capital stock in agriculture and the size of the rural population. An error correction model is then used to investigate short-run dynamic relationships among the variables. Results show that: (1) there is only one stable equilibrium relationship among agricultural wage rates and their determinants in the long run; (2) a 1% change in the domestic terms of trade between agriculture and non-agriculture leads to a 0.48% change in the real agricultural wage rate in the short run and a 0.83% change in the long run; and (3) the analysis suggests a one-time and one-way upwards structural shift of 3.6% in real agricultural wages during the 1980s.