Shocks in the Cities: The Economic Impact of Water Shocks in Latin American Metropolitan Areas

In this paper, we analyze the impact of rainfall shocks on labor market outcomes using gridded weather data and three large harmonized datasets of more than 13,000,000 workers living in the major metropolitan areas of Latin... [ view full abstract ]

In this paper, we analyze the impact of rainfall shocks on labor market outcomes using gridded weather data and three large harmonized datasets of more than 13,000,000 workers living in the major metropolitan areas of Latin America (SEDLAC and LABLAC), and 6,300 firms from enterprise surveys. Results show a multi-faceted vulnerability of cities to large shocks (both wet and dry) that metropolitan infrastructure appears insufficient to buffer, even in one of the world’s best endowed middle income regions in terms of infrastructure. The economic impact of small rainfall shocks (both positive and negative) is low or null. Corroborating a few previous studies, economic activity appears to be negatively affected by large wet rainfall shocks. Surprisingly, the impact of dry shocks is four time larger than for wet shocks. Our results also indicate that informal workers may be more affected. We then test and discuss different pathways to explain the results: the transmission of rural shocks to nearby cities, health consequences of shocks and fluctuations in electricity availability. We do not find evidence supporting a transmission of rural shocks to cities but show that shocks directly affect health and power outages in Latin America.