[REPOST: BusinessMirror] Impact of extreme rainfall days on the well-being of households in the formal and informal sectors

Work Package 2.1.1 Systems Dynamics

This section was reposted from the BusinessMirror’s original article: Impact of extreme rainfall days on the well-being of households in the formal and informal sectors

The Philippines is among the most vulnerable countries to extreme weather events in the world. The geographical location of the country makes it highly exposed to extreme weather events such as typhoons, storm surges, intense flooding, among others. The World Risk Report has consistently ranked the Philippines among the top 3 countries in the world at high disaster risk, along with Vanuatu and Tonga.

Poorer households, especially those in rural areas, are more likely to suffer from disasters and are thus more vulnerable. Households from low socioeconomic backgrounds often face greater disaster risks, but are also the least prepared for disaster events due to several factors including housing affordability, low income, low literacy levels, among others. Informal households—where most of the urban and rural poor belong—tend to be located in hazardous areas, increasing their disaster risk profiles. Disasters increase the vulnerability of informal workers to remain informal, while also increasing the risk that formal workers will fall into informality.

For the Philippines, which has a large informal sector, the adverse effects of extreme weather events are not negligible, and potentially irreversible in this sector of the economy. Using data from the Labor Force Surveys and the Family Income and Expenditure Surveys of the Philippine Statistics Authority (PSA) from 2006 to 2015, we estimate that rural households consist about 60 percent of all households. The proportion of the non-poor is 41 percent and poor 18 percent in 2006. This has improved to 46 percent and 14 percent, respectively in 2015. The PSA does not issue official statistical counts of formal and informal households in the country. Nonetheless, using the PSA definition, we segregated the households into formal and informal sector. We found that 5,330 households are classified as informal in 2006 and has increased to 5,615 household in 2015.  Among the rural poor, the informal sector was 59 percent in 2006 and falling into 48 percent by 2015. For the non-poor, the percentage has likewise fallen from 49 percent in 2006 to 41 percent in 2015.  While the percentage shares have fallen, the absolute number of informal households remain as the most vulnerable to remaining informal and also potentially adding formal households in rural areas.

We then defined extreme rainfall day as a day with rainfall exceeding the 95th percentile over the 1998-2018 period in each year per location. Municipalities where the households live are categorized under “extreme” if the annual number of extreme rainfall days during the preceding year of the survey exceeds the 75th percentile of the annual number of extreme rainfall days across the 1998-2018 period. We utilized satellite-derived daily rainfall from the Tropical Rainfall Measuring Mission (TRMM) Multi-satellite Precipitation Analysis (3B42) dataset  for the years from 1998 to 2018.

We disaggregated average per capita income of the rural households into agriculture and non-agriculture and per capita expenditure into food, non-food, health, and education for the period 2006-2015 during normal and extreme rainfall conditions. We found that during normal rainfall conditions, real incomes and expenditures of informal households are significantly lower relative to formal households living in the same area. Specifically, the income of the informal households are 14 percent lower than formal households. In terms of expenditures, it is 17 percent lower.  However, during extreme rainfall conditions, real income and expenditures of both formal and informal households fall significantly. The income of formal households fall by 14 percent and informal households by 11 percent. As for expenditures, formal households fall by 12 percent and 10 percent for informal households. 

We estimate an economic model of household income, production, earnings, and expenditure with households’ characteristics in the presence of a weather shock, i.e., extreme rainfall days. To assess and differentiate the impact of extreme rainfall days on the welfare of the formal and informal sectors, we first address the selectivity associated with the households being in the formal and informal sectors. The difference in the net benefits determines the sector of choice. We test the hypothesis that extreme rainfall days depress earnings of households and therefore lower their income and consumption.

Using both income and expenditure as welfare indicators, being poor significantly increases the likelihood of being in the informal sector. Living in a largely urban municipality, on the other hand, decreases the likelihood of households being in the informal sector. Implementing the impact of extreme rainfall days, we find that both sectors are affected negatively but the impact is bigger for the formal sector. Households in the formal sector have larger incomes and have more to lose than the households in the informal sector. Thus, there is a potential for households in both sectors to slide into poverty when they are affected by extreme weather events. 

We also find that the formal sector recovers faster than the informal sector. However, the adverse impact to the informal households may be irreversible given their weak capability to recover and their limited ability to smooth out consumption even during days with normal rainfall.

In addition, using a counterfactual analysis of whether a household is formal or informal, we found that there are other factors that explain why income of informal households are lower than the households in the formal sector regardless of the presence of weather shock.

To address these complexities, policies should be targeted social protection coverage to households near the poverty line to help soften the blow of weather shocks. Improving access of the poor informal sector to opportunities that allow them smooth consumption in times of disaster is warranted. This may include  access to credit and insurance, whether formal or informal, to help households in this sector recover faster from the negative impact of weather shocks.  In addition, intensified education campaign about the adverse impact of disasters can provide appropriate nudging to alter people’s behavior towards taking the necessary precautions to mitigate damage and losses.

Ravago, Pascua and Aceron from Department of Economics, Ateneo de Manila University.

Gozo, Cruz and Narisma from Regional Climate Systems Laboratory, Manila Observatory.

This research was supported by Coastal Cities at Risk in the Philippines: Investing in Climate and Resilience Project.