Income Shocks Research Articles

Public assistance, survival, and household trust during the containment period of the first wave of the SARS-CoV-2 pandemic in Togo.

This paper analyzes the impact of public assistance during the first wave of the SARS-CoV-2 pandemic with regard to household survival, using data from a two-round survey of 1274 respondents in Togo conducted by the National Institute of Statistics, Economic and Demographic Studies. The analysis uses the propensity score matching method, the probit model, and the discrete endogenous regressor. The first result shows that more than two thirds of respondents experienced income shocks due to the health crisis. The second result shows that public assistance programs have enabled the beneficiary populations to overcome the impact of shocks.

Do remittances react to commodity windfall? Evidence from Latin America and the Caribbean

Remittance has been growing steadily in the past decades, along with the pace of globalization. The current literature has focused extensively on the impact of remittances on growth, while the causal evidence in identifying the relationship between income shocks and remittances is limited. Using a panel of 30 countries in Latin American and Caribbean (LAC) region from 1990–2014, we examine the effects of exogenous income from international commodity price windfall on remittances. Our paper finds that an increase in commodity windfall leads to a significant rise in remittance inflows. We also reveal that financial development underpins the “commodity windfall-remittances” relation. Remittance is a low-cost financing option in countries with low levels of financial development; hence they receive more remittance flow in response to the commodity windfall. Our finding calls for more policy attention to promote migrants’ access to financial services.

Living under ecosystem degradation: Evidence from the mangrove–fishery linkage in Indonesia

This study examines the impacts of ecosystem degradation on social welfare, focusing on the mangrove–fishery linkage in Indonesia. Using nationally representative household data combined with satellite information on spatiotemporal mangrove loss, the study finds that fishery households experienced a decline in annual income ranging from 5.3% to 9.8% in response to a 1% increase in mangrove loss in the region. Under the income shock, fishery households increased their labor input and decreased their non-food consumption; however, they continued being part of the fishery industry. Furthermore, according to a back-of-the-envelope calculation, the potential economic value of mangrove conservation, estimated in terms of fishery production reached 22,861 US$/hectare/year. This makes conservation substantially more cost-effective than alternative land uses, such as aquaculture and oil palm plantations. These findings highlight the need to support mangrove forest conservation to achieve sustainable development and ecosystem conservation.

Insured Privately? Wealth Stratification of Job Loss in the UK

Job loss is a significant income shock that can lead to declines in living standards and satisfaction. Wealth can provide a key resource in stratifying the risk and the consequences of such an event. In this article, I examine the extent to which wealth stratified the experience of job loss in the UK from 1991 to 2008. I distinguish between different wealth groups using information on homeownership and home value of primary residency, and then study whether these groups face different risks and/or consequences of job loss. The results show that renters were a significantly disadvantaged group compared to homeowners during the observation period. Not only did they faced a significantly higher risk of job loss, they also experienced greater declines in earnings, household income, and life satisfaction, and larger increases in income poverty in the year of job loss. Among homeowners, the risk and consequences of job loss were similar. In a country like the UK with minimal public insurance for unemployment, homeownership appears to provide a significant source of stratification for job loss.

Employment status and financial resilience during the COVID-19 pandemic

PurposeThe purpose of this study is to examine the association between employment status and financial resilience during the COVID-19 pandemic.Design/methodology/approachThis study employed US nationally representative data. A financial resilience index was created based on households' ability to pay for basic living expenses and the resources used to meet such needs. Employment status was categorized into seven groups based on whether the respondent worked for pay in the last seven days, experience of income shock since the start of the pandemic for workers' household and reasons for not working for non-workers' household. A generalized linear model (GLM) model was used to examine the relationship between respondent employment status and household financial resilience. An ordinary least square (OLS) logistic regression with no proportional odds assumption was employed to investigate the association between the respondent's employment status and household ability to pay for basic living expenses. A logistic regression was utilized to explore the relationship between respondent employment status and resources used by the household to pay for basic living expenses.FindingsThe top three least financially resilient households include those in which the respondent's work was affected by the pandemic, the respondent did not work due to being sick with COVID or caring for someone with COVID and the respondent did not work due to fear of COVID.Research limitations/implicationsFuture research should distinguish the reasons for not working when examining the association between unemployment and household financial resilience as well as their overall financial wellbeing. Cross-sectional data cannot establish a causal relationship. Findings using US data may not be generalized to other countries.Practical implicationsWorkers with health and employment risks and financial professionals working with these clients should consider these risks when building household financial safety net. Policymakers should develop measures to allow normal business operations while effectively contain the spread of the COVID-19 virus.Originality/valueThis study created a financial resilience index that considers various household situations, allows both internal and external resources to be utilized to cover basic living expenses and reflects the diverse nature of financial resilience. This study is the first to look into voluntary and involuntary labor force separation for COVID-19 and non-COVID-19 related reasons.

Child marriage as informal insurance: Empirical evidence and policy simulations

This paper investigates the relationship between child marriage and economic incentives in a setting where the bride price – a transfer from the groom to the bride’s parents at marriage – is customary. First, we develop a dynamic model in which households are exposed to income volatility and have no access to credit markets. If a daughter marries, her household obtains a bride price. In this framework, girls may have a higher probability of marrying early when their parents have a higher marginal utility of consumption because of adverse income shocks. Second, we measure the responsiveness of child marriage to income fluctuations by exploiting variation in rainfall shocks over a woman’s life cycle, using a survey dataset from rural Tanzania. We find that adverse shocks during teenage years increase the probability of early marriages. Third, we use these empirical results to estimate the parameters of our model and isolate the role of the bride price custom for consumption smoothing. In counterfactual exercises, we show that enforcing child marriage bans can have lasting effects on the timing of marriage even after a woman has exceeded the minimal age of marriage. The utility cost to parents of such enforcement is not large. Cash transfers, both conditional on avoiding child marriage and unconditional, can reduce early marriages, especially when they target low-income households.

Income inequality and entrepreneurship: Lessons from the 2020 COVID-19 recession

We study entry into entrepreneurship during the COVID-19 recession of 2020 using new data from an extensive survey of more than 24,000 Spanish households, conducted between June and November 2020. We find that while the overall decline in the startup rate in 2020 was large, and of a similar magnitude as that during the Great Recession, the differential impact depending on ex ante income was starkly different. During 2020, the drop in firm entry was entirely concentrated among low- and medium-income households. We show that the entrepreneurship gap between these households and their high-income counterparts is not directly explained by social distancing, since it is mostly driven by the sectors not directly affected by lockdown measures, and it is larger among households that did not suffer a negative income shock during the pandemic. Our results instead indicate that high-income households performed relatively better during the COVID-19 recession because they had the means to exploit new business opportunities, thanks to their larger wealth and better access to external finance.

Retirement and Household Expenditure in Turbulent Times

We examine how expenditure changes at retirement during an institutionally and economically uncertain period when a series of pension reforms and cuts were implemented. Overall, we fail to confirm that consumption declines at retirement using data from Greece (2008–2018). Any estimated declines come from turbulent years when major pension cuts were applied. Expenditure drops at retirement were due to pension income shocks, especially for those who were particularly dependent on pension income. Further checks support the presence of an income shock mechanism for retirees who are relatively more treated during the crisis sub-period. Given an aging population and the ongoing global turbulence, our results offer valuable insights.

PARA ARZI VE REEL GELİR ARASINDAKİ İLİŞKİNİN ASİMETRİK BİR ANALİZİ: MIST ÜLKELERİ İÇİN PARASALCI VE REEL İŞ DÖNGÜSÜ HİPOTEZLERİNİN TESTİ

This article aims to examine the asymmetric money-income relationship in MIST countries. For this purpose, Hatemi-J Panel Hidden Cointegration, asymmetric panel causality, FMOLS and DOLS tests were applied. Asymmetric causality test results reveal that there is a bidirectional causality between money supply and real income. The real business cycle hypothesis claims that the growth in the money supply is due to real income and not vice versa. The finding obtained as a result of asymmetric causality supports both monetary and real business cycle hypotheses for MIST countries. The result is that positive and negative cumulative real money supply shocks affect positive and negative cumulative real income in the economy; Similarly, they state that positive cumulative real income shocks also affect positive real income. Monetary authorities should regulate the money supply and real income independently of the positive and negative shocks in the market in order to eliminate the economic problems experienced as a result of sudden shocks in MIST countries and to stabilize the markets.

Employment and Income Shock During COVID-19 Lockdown in a Metropolitan city in India

The COVID-19 crisis had a harsher impact on women globally, as they were disproportionately represented in sectors offering low wages, few benefits and least secure jobs. We examined the economic impact of loss of employment and incomes on workers in relatively low income households during and after the first stringent lockdown—April to June 2020—in Ahmedabad, Gujarat. We analyse employment impact using a logistic regression and impact on incomes using a Fixed Effect OLS regression. We find that the impact on women workers was greater in terms of loss of employment and income. Women had clearly not resumed work at the same rate as men after lockdown was eased. We address the specific question, ‘why were women less likely to resume work after the shock of lockdown?’ We found that care responsibilities did not explain later resumption of work, but the place of work did. In addition we address the question ‘which segments of workers suffered greater income loss?’ We analyse these questions for wage and self-employed workers and by prominent occupations in the sample. We find that while wage-employed workers resumed work later, they suffered less income loss than the self-employed. We attempt to explain this paradox. JEL Codes: J4, J46, J39, O17, R23

Welfare and Spending Effects of Consumption Stimulus Policies

Using a heterogeneous agent model calibrated to match measured spending dynamics over four years following an income shock (Fagereng, Holm, and Natvik (2021)), we assess the effectiveness of three fiscal stimulus policies employed during recent recessions. Unemployment insurance (UI) extensions are the clear “bang for the buck” winner, especially when effectiveness is measured in utility terms. Stimulus checks are second best and have the advantage (over UI) of being scalable to any desired size. A temporary (two-year) cut in the rate of wage taxation is considerably less effective than the other policies and has negligible effects in the version of our model without a multiplier.

COVID-19 and the Formation of Energy Conservation Routines: Disentangling the Relative Importance of Attention and Income Shocks

COVID-19 and the Formation of Energy Conservation Routines: Disentangling the Relative Importance of Attention and Income Shocks

Inequality and Asset Fire Sales

It is widely acknowledged that fire sales were a critical factor in inducing and exacerbating the financial crises of 2007--2008. The leverage of financial intermediaries, which is defined as the ratio of total assets to capital, is a key factor in causing fire sales. Why do financial intermediaries expand their balance sheets despite subsequently having to sell their assets at discounted prices? To examine this question, we incorporate financial intermediaries into a three-period incomplete market economy model, in which households face countercyclical and uninsured idiosyncratic income shocks. We demonstrate that countercyclical income inequality and market incompleteness result in leveraged investment and subsequent asset fire sales by financial intermediaries in equilibrium. The first contribution of this paper is that we demonstrate that the mechanism between asset prices and leverages could successfully solve the famed asset-pricing puzzles. The second contribution is that we analyze the impact of financial regulation on the welfare of ex ante homogeneous households.

Borrowing into debt crises

Quantitative models of sovereign default predict that governments reduce borrowing during recessions to avoid debt crises. A prominent implication of this behavior is that the resulting interest rate spread volatility is counterfactually low. We propose that governments borrow into debt crises because of frictions in the adjustment of their expenditures. We develop a model of government good production, which uses public employment and intermediate consumption as inputs. The inputs have varying degrees of downward rigidity, which means that it is costly to reduce them. Facing an adverse income shock, the government borrows to smooth out the reduction in public employment, which results in increasing debt and higher spread. We quantify this rigidity using the OECD Government Accounts data and show that it explains about 70% of the missing bond spread volatility.

How Effective were Job-Retention Schemes during the COVID-19 Pandemic? A Microsimulation Approach for European Countries

The COVID-19 pandemic had posed a dramatic impact on labor markets across Europe. Forceful fiscal responses have prevented an otherwise sharper contraction. Many countries introduced or expanded job-retention schemes to preserve jobs and support households. This paper uses a microsimulation approach (EUROMOD) and household data to assess the effectiveness of those schemes in stabilizing household income during the pandemic across European countries. Empirical evidence shows that job-retention schemes were effective in stabilizing income and, along with other measures, absorbed nearly 80 percent of market income shocks—almost doubling the extent of the automatic stabilization of the pre-pandemic tax and benefit systems. The large effects are related to the widespread use and scaling up of those schemes and a deep but short-lived disruption to labor markets during the pandemic. Along with other fiscal support measures, job-retention schemes helped mitigate the rise in the unemployment rate, by about 3 percentage points, and income inequality during the pandemic. Our results show that job-retention schemes were largely targeted, in which households more vulnerable to income losses, such as lower-income families, youth, and low-skilled workers, are able to stabilize their income.

Effectiveness of post-disaster coping strategies among the farming households in the coastal districts of Odisha, India

Farmers in developing countries generally faced vulnerability in consumption due to income shocks caused by crop damage, price falls, disasters, etc. The ability to respond to such income shocks is determined by their asset structure labour endowment, access to credit and so on. Using information from 459 sample households in the three coastal districts of Odisha; India, this paper examines the effectiveness of ex-post coping strategies adopted by the farming households in the study regions. Based on wealth index score, we classified the sample households in to poor, medium and rich income groups for a deeper understanding of the impact floods on their consumption patterns. Ordinary least square (OLS) regression model was used for examining the effectiveness of post disaster coping strategies adopted the sample households. The results of regression model show that the practice of borrowing money from formal/informal sources is one of the most effective strategies resorted by the sample households in the study regions. Seasonal migration is an alternative strategy followed by poor and middle-income households in the study regions, whereas accessing to government or non-governmental assistance measures is an effective strategy on the part of richer households. Among the socio-economic characteristics, the educational attainment of household heads and the landholding size possessed by households have had a significant influence on narrowing down the consumption gaps. In this scenario, along with an effective implementation of welfare and employment generation programmes like Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS), a widen access to the formal loan market helps farmers reduce migration and provide a secure income to the people which, in turn, helps them reduce their relative consumption gaps.

Exploring household financial strain dynamics

Rising energy and food prices are causing living standards to fall across Europe and straining household budgets. The longer-term outlook for households is unclear as the dynamics of financial strain are not well understood. We address four important research questions on financial strain dynamics by applying a dynamic random coefficients probit model with duration and occurrence dependence to De Nederlandsche Bank (DNB) Household Survey panel data. We find no evidence that households become habituated or sensitised to financial strain over time unlike in studies of responses to stress. Entry into household financial strain is less likely when the household can cope by increasing earnings from work or by borrowing from family and friends but not by the economically inactive entering employment. Our third result is that the persistence of financial strain can be explained by a mutually-enforcing negative cycle through worse health but not through marital conflict or more short-sighted and risk averse decision-making. Finally, we find that neither income or wealth shocks affect financial strain in contrast to other studies. Further research into understanding the experience of financial hardship is warranted in the light of the economic challenges caused by the current cost of living crisis.

Do positive income shocks benefit children’s education? Evidence from Vietnam

ABSTRACT This study investigates the causal effect of positive income shocks on education in Vietnam using the 1993 and 1998 Vietnam Living Standard Surveys. We measure income shocks by families’ lottery winnings, controlling for lottery purchases. In general, lottery winnings have no significant effect on school enrolment. However, we find a positive and significant effect from lottery winnings on expenditure for children’s education. A 1% increase in lottery winnings increases expenditure on children’s education by 0.12%. Interestingly, we find a stronger effect from lottery winnings on school enrolment and expenditure for education for girls than for boys, helping to decrease gender inequality in education.

MPCs in an emerging economy: Evidence from Peru

This paper estimates the marginal propensity to consume (MPC) out of transitory income shocks for an emerging economy, Peru, using its nationally representative household survey. The mean quarterly MPC across Peruvian income deciles is 0.204, which translates to a mean annualized MPC of 0.545–0.592 under both model-free and model-based annualization methods. To compare Peruvian and U.S. MPCs reflecting the different reference periods of the underlying surveys, I employ a standard incomplete-market model. Two striking differences emerge. First, the mean annual MPC in Peru is three times as large as that in the U.S. Second, the MPCs are substantially more heterogeneous over income deciles in Peru than in the U.S. The model predicts that precautionary saving behavior drives both the higher mean MPC and stronger MPC heterogeneity in Peru.

Agricultural windfalls and the seasonality of political violence in Africa

AbstractWhen the prices of cereal grains rise, social unrest and conflict become likely. In rural areas, the predation motives of perpetrators can explain the positive relationship between prices and conflict. Predation happens at places and in periods where and when spoils to be appropriated are available. In predominantly agrarian societies, such opportune times align with the harvest season. Does the seasonality of agricultural income lead to the seasonality of conflict? We address this question by analyzing over 55 thousand incidents involving violence against civilians staged by paramilitary groups across Africa during the 1997–2020 period. We investigate the crop year pattern of violence in response to agricultural income shocks via changes in international cereal prices. We find that a year‐on‐year one standard deviation annual growth of the price of the major cereal grain results in a harvest‐time spike in violence by militias in areas where this cereal grain is grown. This translates to a nearly 10% increase in violence during the early postharvest season. We observe no such change in violence by state forces or rebel groups—the other two notable actors. By further investigating the mechanisms, we show that the violence by militias is amplified after plausibly rich harvest seasons when the value of spoils to be appropriated is higher. By focusing on harvest‐related seasonality of conflict, as well as actors more likely to be involved in violence against civilians, we contribute to the growing literature on the economic causes of conflict in predominantly agrarian societies.