Feleke, Shiferaw T.

Starnes, Jane H.

Tiller, Kelly

English

Research Papers in Economics

www.postersession.com 
Effects of Amendments to H-2A Rules on Use of H-2A Program in Tobacco 
Growing States 
Shiferaw T. Feleke 
Center for Tobacco Grower Research (CTGR) 
University of Tennessee; 2621 Morgan Circle; Knoxville, TN 37996 
sfeleke@utk.edu 
Jane H. Starnes 
Center for Tobacco Grower Research (CTGR) 
University of Tennessee; 2621 Morgan Circle; Knoxville, TN 37996 
jhstarnes@utk.edu 
Kelly J. Tiller 
Center for Tobacco Grower Research (CTGR) 
2621 Morgan Circle; Knoxville, TN 37996 
ktiller@utk.edu 
Selected Poster prepared for presentation at the Agricultural & Applied Economics 
Association’s 2011 AAEA & NAREA Joint Annual Meeting, Pittsburgh, Pennsylvania, 
July 24-26, 2011 
Copyright 2011 by Shiferaw T. Feleke, Jane H. Starnes and Kelly J. Tiller. All rights 
reserved. Readers may make verbatim copies of this document for non-commercial 
purposes by any means, provided this copyright notice appears on all such copies. www.postersession.com 
The Department of Labor  (DOL) amended elements of the 
2008 H-2A Final Rule and adopted the 2010 Final Rule which 
came in effect on March 15, 2010. Compared to the 2008 Final 
Rule, the 2010 H-2A Final Rule is arguably costlier to farm 
employers. The major cost-increasing element of the 2010 
H-2A Final is the change in methodology in which the Adverse 
Effect Wage Rate (AEWR) is calculated. In the 2008 Final rule, 
the AEWR was estimated based on the Occupational 
Employment Statistics (OES) wage survey which is undertaken 
by the Bureau of Labor Statistics (BLS) of the DOL. However, 
in the 2010 Final Rule, the DOL reverted to the 1987 Final Rule 
methodology that set the AEWRs based on the Farm Labor 
Survey (FLS) of the United States Department of Agriculture 
(USDA). Since OES and FLS surveys cover different farm-
related employers and provide different levels of detail by 
occupation and geographic area, they provide different 
estimates of AEWR. The FLS-based AEWR are annual 
weighted average hourly wage rates for field and livestock 
workers (combined) by region while wages from the OES 
survey are established by levels of skill and experience. The 
change in methodology from OES to FLS surveys raises the 
national average of the AEWR by $1.02 per hour. 
The increase in the AEWR increases production costs to 
employers, potentially leading to a reduction in the number of 
petitions for H-2A workers. Considering the fact that tobacco 
growers are major employers of the H-2A program, and that 
labor expenses account for  the largest proportion of the cost of 
tobacco production, their marginal costs are more sensitive to 
labor costs potentially decreasing their overall profit margin in 
response to the increase in the AEWR. Considering the 
prevailing balance of bargaining power between growers and 
manufacturers in marketing contracts, the price paid for tobacco 
may not increase enough to cover the increased labor costs.  
Given these circumstances, one plausible option that tobacco 
growers have is to absorb the higher labor costs decreasing 
profit margins, given steady tobacco prices. Another plausible 
option is that they adjust their production process decreasing 
expenses such as employing less workers. 
Objective 
To assess the effect of the increase in Adverse Effect Wage Rate 
due to the 2010 Final Rule on tobacco production, revenue and 
producer benefits under the current product and labor market 
conditions as well as under different scenarios in which growers 
bear the additional costs of production. 
The effect of the increase in AEWR due to the 2010 H-2A 
Amendments is assessed using a Linear-in-logarithms 
Equilibrium Displacement Model. 
From a system of nine labor and tobacco demand and supply 
equations in log-differential forms describing the U.S. tobacco 
economy, the proportional change in tobacco price due to the 
increase in wage rate was derived through a substitution method 
as: 
dLnP  is the percentage change in tobacco price 
ε  is the price elasticity of the supply of tobacco 
A=αµ+(1-α) µe  is the price elasticity of the derived demand for 
labor 
γ is the labor cost share 
α is the share of domestic labor 
µ is the price elasticity of the demand for domestic labor 
dLnW  is the percentage change in adverse effect wage rate 
β is the share of domestic tobacco sales 
η is the price elasticity of the domestic demand for tobacco 
Then the change in producer surplus was calculated using:  
(2)   ΔPs=(dLnP-dLnC)P0Q0(1+0.5dLnQ) 
where 
P0 is the initial equilibrium price 
Q0 is the initial equilibrium quantity 
dLnP is the percentage change in tobacco price 
dLnQ is the percentage change in tobacco output 
dLnC is the percentage change in marginal cost 
Effects of Amendments to H-2A Rules on Use of H-2A  
Program in Tobacco Growing States 
Shiferaw T. Feleke, Jane H. Starnes and Kelly J. Tiller 
Center for Tobacco Grower Research (CTGR) 
University of Tennessee 
The increase in marginal cost of production due to the nearly 4% increase in AEWR in burley growing states, and about 5% in flue-
cured growing states would affect the welfare of growers depending on whether and how much the additional cost they are willing to 
bear and how much they are able to pass onto manufacturers and leaf dealers in the form of a higher tobacco price. 
This poster has provided preliminary estimates of the effect of the increase in AEWR on tobacco production due to the 2010 H-2A 
Amendments that went into effect on March 15, 2010. Results suggest that the increase in labor costs due to these amendments has 
important economic consequences for tobacco growers if they have to fully absorb the additional labor costs in which case burley 
growers would be worse off with a loss of $5.6 million in producer surplus. With respect to flue-cured growers, if they bear the full cost 
of the increase in adverse effect wage rate, they would be worse off with a loss of about $11 million in producer surplus, which is twice 
the loss of burley growers. 
Under the current market conditions, it is possible that both burley and flue-cured growers are able to pass on 66% of the additional 
cost of production associated with the increase in the AEWR.  In other words, given their demand behavior in the labor market and 
their supply behavior in the tobacco market, they can offset 66% of the increase in costs. 
While these estimates were made under the assumption of no adjustment in the production process, it is likely that the additional costs 
associated with the new rules prompt both burley and flue-cured growers to make adjustments in their production process. In the 
absence of such adjustments, the additional costs may have significant implications for competitiveness. 
Introduction  Results 
Variables  Burley  Flue-cured 
Domestic 
labor 
-2.19  -2.39 
H-2A labor  -4.77  -6.38 
Total 
employment 
-2.58  -3.99 
Table 3: Effects of the 
increase in AEWR on 
domestic and H-2A 
employment in tobacco farms 
The pass-through 
elasticity 
Variables 
Market 
Response 
0% pass-
through 
25% pass-
through 
50% pass-
through 
75% pass-
through 
100% pass-
through 
Price  1.11  0.00  0.42  0.84  1.25  1.67 
Domestic demand  -1.62  0.00  -0.61  -1.22  -1.83  -2.44 
Export demand  -3.33  0.00  -1.25  -2.51  -3.76  -5.02 
Total output  -2.65  0.00  -1.00  -1.99  -2.99  -3.99 
Revenue  -1.54  0.00  -0.58  -1.16  -1.74  -2.31 
Surplus($)  -1.26  -5.63  -4.20  -2.79  -1.39  0.00 
Revenue($)  -5.17  0.00  -1.95  -3.89  -5.84  -7.79 
Supply(Lbs)  -5.33  0.00  -2.01  -4.02  -6.02  -8.03 
Variables 
Market 
response 
0% pass-
through 
25% pass-
through 
50% pass-
through 
75% pass-
through 
100% pass-
through 
Price  0.84  0.00  0.32  0.64  0.96  1.28 
Domestic demand  -1.23  0.00  -0.47  -0.93  -1.40  -1.86 
Export demand  -2.53  0.00  -0.96  -1.91  -2.87  -3.83 
Total output  -2.04  0.00  -0.77  -1.54  -2.31  -3.08 
Revenue  -1.19  0.00  -0.45  -0.90  -1.35  -1.80 
Surplus($)  -2.53  -11.20  -8.37  -5.56  -2.77  0.00 
Revenue($)  -10.49  0.00  -3.96  -7.92  -11.88  -15.85 
Supply(Lbs)  -10.17  0.00  -3.84  -7.68  -11.52  -15.37 
With regard to employment, burley 
and flue-cured would cut their total 
employment by nearly 2.6% and 
just over 4.0%, respectively with 
the use of the H-2A labor declining 
5% in burley farms and over 6% in 
flue-cured farms.  
Conclusion 
CENTER FOR TOBACCO GROWER RESEARCH
Methods 
Table 1: Effects (%) of the increase in AEWR on burley tobacco production and revenue. 
Table 2: Effects (%) of the increase in AEWR on flue-cured tobacco production and revenue. 

Effects of Amendments to H-2A Rules on Use of H-2A Program in Tobacco Growing States

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