Rising real wages, mechanization and growing advantage of large farms: Evidence from Indonesia

•Relatively larger farmers increased the size of operational farm land by renting in land in response to rising real wages in Indonesia.•Machines and land are complementary.•Consistently, the inverse farm size – productivity relationship tends to be reversed among relatively large holders.•The above results have food security policy implications to many Asian countries where real wages are rapidly rising and small farms are predominant.

This paper examines dynamic patterns of land use, capital investments and wages in agriculture using farm panel data from Indonesia. The empirical analysis shows that with an increase in real wages that prevailed in both agricultural and non-agricultural sectors in rural areas, relatively larger farmers increased the size of operational farm land by renting in land as well as used more hired-in machines through machine rental and/or service providers, which induces the substitution of labor by machines. Machines and land are complementary and, consistently, the inverse farm size-productivity relationship tends to be reversed among relatively large holders. The results support growing (diminishing) advantage of large (small) farms in the presence of rapidly rising real wages and have food security policy implications to many Asian countries where real wages are rapidly rising and small farms are predominant.