Impact of Extreme Rainfall Days on the Welfare of Households in the Formal and Informal Sectors

We differentiate the impact of extreme weather shocks on the welfare of the formal and informal sectors by utilizing nationally representative household survey data from the Philippines. We deviated from the typical measure of extreme tails of normalized rainfall values using normal distribution and instead used a novel measure of extreme rainfall from satellite-derived data. We estimate the vulnerability of households using an endogenous switching regression model to account for the heterogeneity in the decision to be in either sector. We find evidence that households’ welfare is adversely affected by extreme rainfall days, but the negative impact is bigger on the welfare of the formal sector. Households in the formal sector have higher incomes and thus have more to lose. However, the adverse impact on informal households may be irreversible given their weak capability to recover and their limited ability to smooth out consumption even during years considered normal. The negative effects of experiencing extreme rainfall three years ago linger. Thus, vulnerable households in the formal sector can potentially slide down to poverty, and those in the informal sector go deeper into poverty when hit by extreme weather events.