When disaster strikes: Labour shifts and sectoral change in developing economies

Natural disasters cause shifts in employment and sectoral composition in developing countries. While empirical studies show that disasters increase informal employment and reduce agricultural wages, theoretical explanations remain limited. This paper develops a three-sector general equilibrium model to examine how disasters affect sectoral employment, output, and factor returns. Disasters reduce agricultural output by damaging land, triggering rural–urban migration. As rural livelihoods collapse, the economy reallocates labour and capital across sectors. With more workers in cities, the labour-intensive informal sector expands with rising informal wages, while the capital-intensive formal sector contracts, reducing capital demand and lowering returns to capital. Agricultural wages fall when land is more affected, as output must drop to match the fixed land supply. When labour is more affected, more labour is needed per unit of output, raising costs and reducing land returns. These insights support policies for rural recovery and safer transitions out of informality.