Weather Shocks and Income Inequality

Abstract Climate change is predicted to increase both the frequency and the severity of weather shocks that adversely affect the livelihood of humans, especially those working in agriculture. We study the impact of weather shocks on welfare and how it exacerbates household income inequality. We first recognise the limitations of existing measures of weather shocks and propose an absolute measure that is more robust to the length of time over which weather samples are obtained. Next, we study the impact of the newly constructed weather shocks on welfare measured by different income sources and different types of consumption. The findings suggest that weather shocks reduce crop revenue significantly. We then consider how the diverse impact of weather shocks affects household income inequality. The Gini decomposition of income sources suggests crop income reduces income inequality in rural areas. Overall, weather shocks reduce income from crops and therefore they increase income inequality. JEL Classification: D63, O13, O18