The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.

Abstract:While it is clear that natural disasters have serious welfare consequences for affected populations, less is known with respect to how local labor markets in low income countries adjust to such large shocks, in particular the general equilibrium effects of the increase in the demand for construction as well as the inflow of resources in the aftermath of natural disasters. Building on the literature on local labor markets (Moretti, 2010a,b), this paper investigates whether there is evidence that changes in the relative prices of non-tradable to tradable goods induced by a demand shock due to a natural disaster lead to a reallocation of employment and wage premia across sectors. Combining data from the Indonesia Family Life Survey and the US Geological Survey we study the effect of earthquakes on local labor markets in Indonesia. We find evidence for sectoral reallocation of workers as well as significant and persistent wage premia. Employment in the construction sector increases significantly and contracts in the agriculture sector in the two years after an earthquake takes place in a community. There appear to be substantial labor market rigidities since even after sectoral mobility has taken place, individuals employed in sectors producing non-tradable goods experience significantly higher wage growth in communities that were struck by an earthquake. These effects are homogenous along the quantiles of the conditional income growth distribution. Thereby, they neutralize otherwise occurring differential earnings growth patterns across sectors and operate as pure location shifts of the income distribution rather than altering the shape.

In most developing countries, there is a large gap in average consumption per capita between urban and rural areas. One appealing interpretation of this gap is that it reflects a spatial equilibrium, in which the higher consumption levels of urban areas are offset by lower nonmonetary amenities. In this paper, we draw on new high-resolution evidence to document how non-monetary amenities vary across space within 20 developing countries. We focus on measures of health, public goods, crime and pollution. These vary substantially across locations within countries and can be carefully measured with highly comparable data. We find that in almost all countries, and for almost all measures, the quality of these amenities is non-decreasing in population density. In addition, net internal migration flows are directed toward denser areas in every country. These findings are hard to reconcile with a spatial equilibrium. Instead, they suggest that developing countries are undergoing a reallocation of workers to densely populated areas, consistent with many models of structural change but inconsistent with models that assume a simple static spatial equilibrium.

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The connections between transport infrastructure and economic development have been extensively analyzed in previous research, but little is known about the cost of infrastructure investments in poor countries. This paper examines drivers of unit costs of construction and maintenance of transport infrastructure in low and middle income countries, and documents that: (i) there is a large dispersion in unit costs for comparable road work activities; (ii) after accounting for environmental drivers of costs, residual unit costs are significantly higher in conflict countries; (iii) there is evidence that costs are higher in countries with higher levels of corruption; (iv) these effects are robust to controlling for a country's public investment capacity and business environment. Our findings have implications for governments aiming to increase connectivity in poor countries.

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This paper has been prepared as part of a series of studies on 'Natural resources, structural change, and industrial development in Africa' as part of a larger UNU-WIDER research project on 'Jobs, poverty and structural change in Africa'.

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