Diversification and Labor Market Effects of the Mexican Coffee Crisis

•Between 2001 and 2005 many Mexican coffee growers adopted other activities.•In regions where coffee is a dominant crop, labor market effects of the low coffee prices favor adoption of more value-adding activities, as wages fall.•In better connected and less specialized regions, off-farm jobs are the more likely response.•Policy interventions should adapt to these differences, targeting workers in specialized regions, and producers in other regions.•Special attention appears to be needed for older farmers in non-specialized regions who do not diversify at all. This paper analyses how coffee-producing households responded to the low coffee prices prevailing around 2003. We provide theory on differential responses in regions dedicated to coffee growing, compared to more diversified or better accessible regions. We show how labor market effects can explain why in the former regions value-adding activities (processing, certification) are undertaken while in the latter regions off-farm activities are adopted. Farm size favors value-adding activities as well as on-farm diversification. These findings call for policy responses to low prices that distinguish between specialized regions and diversified or well-connected regions.