The hole dug deeper : Flash floods, income disparities, and labor informality in Brazil

Abstract

This paper studies the differential effect of flash floods on income across deciles and the role informality plays in this relationship. While previous research has established that natural hazards will have distinct economic impacts depending on an individual's position on the income distribution, they have largely failed to explore the precise mechanisms driving the variegated impact. In this paper, I explore multiple potential avenues through which climate disasters can have a pronounced impact on the lower versus middle and upper income groups in developing countries. I leverage survey microdata from Brazil in the period 2012–2022 to explore how informal employment (which accounts for a large proportion of workers in low and middle-income countries) and employment in vulnerable sectors leaves low-income individuals more vulnerable than those at higher levels of the income distribution to the economic impacts of climate disasters. This higher degree of vulnerability leads to larger income losses at the lower end of the income distribution up to a year after a flash flood, implying short-term increases in income inequality in affected regions. I find that this differential impact operates primarily through the predominance of informal employment among poorer workers. My work highlights the necessity of policies to reduce informal employment and mitigate the impacts on vulnerable sectors as natural hazards become more common and more destructive.