Economic factors of wage formation and land valuation in the agricultural sector
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How wages are formed in the agricultural sector
The economy of any agricultural enterprise is influenced by specific pricing objects: labor, land, capital, and intellectual property results (know-how). The main factor in workers' well-being remains the price of labor — it is determined by the wage rate in the labor market. To differentiate payment based on the complexity, intensity, qualifications, and social significance of the labor, farms use a tariff system.
In practical work, it is important to distinguish between nominal and real wages. The nominal wage represents the monetary amount received for a certain period of work, while the real wage is expressed by the volume of goods and services that can be purchased with this money. The level of wages in agriculture traditionally remains lower than in other sectors of the economy: for example, in 2006, the wage in the agro-industrial complex amounted to only 40.2% of the national average.
Due to the low level of official wages, personal subsidiary farming often still acts as the main factor of well-being and simple reproduction of the labor force in rural areas.
The volume of funds allocated for employee payments directly depends on labor productivity and the prices of produced goods. The more products are obtained per hectare or farm and the higher their market value, the more money the enterprise can pay to the workers. In addition, the price of labor is influenced by the scarcity of specialists in rare professions and the activity of trade unions.
When forming the staffing table, the wage rate is compared with the marginal labor productivity — the increase in production provided by each additionally hired worker. The personnel situation in the industry was complicated by the consequences of the 1990s reforms, which caused a shortage of funds for payment, job cuts, and a deterioration in the age structure of the population. The following measures allow increasing the demand for labor and its payment level:
- restoration and development of the livestock animal population;
- increase in production volumes and sales of gross output;
- creation and expansion of industrial subsidiary production facilities;
- development of the social infrastructure of rural areas.
- Wage level in the agro-industrial complex (2006) — 40.2% of the economic average
- Rental income of the plot — 26 thousand rubles per year
- Land price at a rate of 10% — 260 thousand rubles
- Land price at a rate of 5% — 520 thousand rubles
Land and rent: economic mechanisms for assessing the main resource
Land is the main resource of agricultural production, which is not created by human labor; therefore, its price cannot be expressed through socially necessary labor costs. The economic value of land lies in its ability to bring constant income. This income appears in the form of land rent — payment for the right to own or use a plot, which does not require the owner to engage in entrepreneurial activity.
The price of land represents capitalized rent. The owner of the plot and its potential buyer compare the rental income with the bank interest rate on a deposit. The owner will agree to sell the land only if the received sum, when deposited in a bank, brings an income no less than the annual land rent.
| Annual rental income | Bank interest rate | Calculated land plot price |
|---|---|---|
| 26 thousand rubles | 10% | 260 thousand rubles |
| 26 thousand rubles | 5% | 520 thousand rubles |
The final market price of land is determined by the balance of supply and demand, provided that the free circulation of agricultural land is permitted in the state. Demand for land as a production resource depends on the prices of agricultural products, the level of economic soil fertility, and the cost of the material resources involved, including capital.
An increase in the market price or rent does not lead to an increase in the total supply of land, as this resource is strictly limited by nature. Only the supply of specific private plots can change.
Cost of capital: how the interest rate affects production decisions
For current production activities, agricultural enterprises often attract borrowed funds. The price of this capital is the interest rate, or loan interest, through which the principle of paid credit is realized. Loan provision relations take the form of buying and selling a special commodity, moving according to the M—M1 scheme. The payment for the use of the service is included in the farm's costs as an mandatory element of expenditures.
When forming the rate, the bank sets it higher than the deposit interest to ensure its own profitability. At the same time, the price of capital is calculated taking into account investment risks and general market conditions. The cost of a loan is formed under the influence of several key factors:
- supply and demand in the financial market;
- inflation rate;
- bank costs for providing the service;
- term and size of the issued loan;
- degree of risk when investing funds.
Revenue from product sales must exceed costs by an amount no less than the loan interest rate. If production profitability turns out to be lower than the cost of capital, investments in agribusiness become less profitable than placing money in a bank deposit.
The higher the loan interest rate, the lower the demand for borrowed capital from the agricultural sector. As financial resources become more expensive, producers are forced to reduce investments in production. As a result, the cost of capital has a decisive influence on the scale and development dynamics of the entire farm.
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