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Income Diversification Index
The income diversification index literature contains a number of measures and indices, including the inverse of the Herfindhal Index (Ersado, 2006), the Herfindhal diversity Index (Block and Webb, 2001), the Simpson Index of diversity (Minot et al., 2006) and the number of income sources (NYS) (Ersado, 2006). Calculation of these indices requires data on agricultural activities (e.g., livestock production, cash crop production, food crop production), as well as off-farm work (e.g., wage employment, non-labor income such as remittances, self-employment in business or enterprise, and self-employment in agriculture). The calculated income diversification index may be used further to examine the factors affecting income diversification, which may include climate, asset wealth, or household and location characteristics.
How to operationalize the metric
Method of data collection and data needed to compute the method:
Estimating of the income diversification index requires collection of data on the different income sources of the household. This data is usually collected by survey. In the household section questions are asked for each member of the household on;
- If they worked as an employee non-agriculture
- If they worked in a self-owned business enterprise
- If they worked in a salaried job
a. With all the questions above, a question on how much was earned from the job for that duration is asked to get at the total wage earned.
In addition, for the agricultural survey, questions on the agricultural activities that a household are engaged in is enumerated. This includes;
- Livestock production and the value of output
- Food crop production and the value
- Cash crop production and value (cash crop is not a sections but a cash crop may be identified from the list of “traditional cash crops” due to the sales volume.
Examples of surveys where these data are enumerated are the LSMS surveys (NBS, 2014). Ersado (2006 examines income diversification and provides a categorization of off-farm income sources. This example is presented in Table 6.
Unit of analysis:
The unit of analysis for the income diversification index depends on the choice of the index. In this case we focus on the inverse of the Herfindhal’s index of concentration (2006). This measure is unitless and takes on a minimum value of 1 for the least diversified source to an upper value that is dependent on the number of income sources and shares. The higher the diversity score, the more income diversified the household is.
The equation or algorithm used for estimating this score is: Sj=
Where Yj is income from source j, Y is total income from n sources, and Sj is the share of income from source J (for additional details see; Block and Webb, 2001; Ersado, 2003; Minot et al., 2006).
Limitations regarding estimating and interpreting:
Computation of this index is data intensive and may complicate measurement where data on income are difficult to enumerate for labor or where data quality issues exist. Ersado (2006) recommends an alternative simple measure of the number of income sources per household. Although not taking into account the share of each income source, it does provide a count of the number of income sources that household has. This may be computed by simply listing the income sources and asking the household to indicate which of those are activities from which the household obtains income. The maximum value of this index will be the number of activities listed.