Journal of Development Economics 125 (2017) 40–58

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Journal of Development Economics

journal homepage: www.elsevier.com/locate/jdeveco

Natural disasters and labor markets MARK

Martina Kirchberger
Trinity College Dublin, Ireland

A R T I C L E I N F O A BS T RAC T

JEL classification: While it is clear that natural disasters have serious welfare consequences for affected populations, less is known
J20 about how local labor markets in low-income countries adjust to such large shocks. Combining data from the
Q54 Indonesia Family Life Survey, the DesInventar database, the U.S. Geological Survey, and district-level
O10 employment indicators, this paper explores how a large earthquake in Indonesia affected labor market
Keywords: outcomes, in particular the evolution of wages across sectors. I find that the earthquake had a positive effect on
Local labor markets wage growth for workers who were employed in the agricultural sector at baseline. I propose two mechanisms
Natural disasters for this result: a higher growth rate of the price of rice and a downward shift in the supply of workers in the
Aid
agricultural sector. I show that evidence mainly supports the latter: labor shifted out of the agricultural sector
Reconstruction
into the construction sector, raising the marginal product of labor in agriculture.

1. Introduction in lower- and middle-income countries are incomplete and access to

The damage from natural disasters has been rising globally in the
past two decades; deaths tend to be concentrated in low-income
countries (Kahn, 2005; United Nations and World Bank, 2010).
There is increasing micro-level evidence of the effect of natural
disasters on poverty, expenditures, incomes, remittances, and child
health in developing countries (Anttila-Hughes and Hsiang, 2013; Baez
and Santos, 2008; Gignoux and Menéndez, 2016; Halliday, 2006;
Premand, 2008; Yang, 2008). However, little is known about how labor
markets are affected.1 The objective of this paper is to understand the
effects of large-scale destructive shocks on labor markets in lower- and
middle-income countries. Such shocks share four main features. First,
a large proportion of the damage occurs in the housing sector; for
example, 40% of the damage and losses from the 2010 earthquake in
Haiti were due to destroyed and damaged housing (Government of
Haiti, 2010), and this share is even higher for other earthquakes
(BNPB, 2009; BAPPENAS, 2006). Second, instantaneous capital
liquidity of the government might be a constraint, delaying the
disbursement of funds (and thereby the response) in the immediate
aftermath of a disaster (World Bank, 2012a). Third, once the emer-
gency phase is over, aid flows earmarked for reconstruction often last
for several years following the disaster. Following the 2004 tsunami,
US$ 1.6 billion was allocated to the housing sector in the Indonesian
province of Aceh, which is equivalent to 25% of the total reconstruction
funding and 30% of Aceh's regional GDP. Reconstruction funding
continued for several years after the tsunami. Finally, social safety nets
credit is constrained, making livelihood reconstruction an utmost
priority.
I use the large earthquake that hit Yogyakarta in Indonesia on 27
May 2006 to study the labor market effects of large destructive shocks.
This earthquake was one of the costliest disasters in the past 10 years,
and disaster response was coordinated and swift. It is therefore a useful
event to study the combined effect of the destruction and large inflows
of resources. To measure the effect of the earthquake, I use data on the
number of houses destroyed as reported by the Indonesian govern-
ment, as well as the modified Mercalli intensity, an exogenous measure
that is based on recorded ground motions. The U.S. Geological Survey
computes this measure for all major earthquakes, making this an
illustrative case study for its use in a range of other contexts, in
particular when household surveys do not ask individuals about past
earthquake exposure.2 I link these with data from the Indonesia Family
Life Survey (IFLS), the country's only large-scale individual-level panel
survey, which contains detailed labor market information. Since
individuals' sectoral choices are likely to be correlated with both
time-invariant and time-varying unobservables, it is vital to have
information on individuals' employment sectors before the earthquake
occurred. The median respondent was interviewed 638 days after the
earthquake, which allows me to investigate the effect at a single point in
time after the earthquake. To uncover the mechanisms and measure
general equilibrium effects, I use community-level price data and
district-level employment indicators from the Socio-Economic
Surveys in 2004 and 2007.

E-mail address: martina.kirchberger@tcd.ie.

1
Exceptions using county-level data for the United States are Belasen and Polachek (2008, 2009), and Deryugina (2013).
2
See http://earthquake.usgs.gov/earthquakes/shakemap/.

http://dx.doi.org/10.1016/j.jdeveco.2016.11.002
Received 4 November 2014; Received in revised form 11 November 2016; Accepted 15 November 2016
Available online 19 November 2016
0304-3878/ © 2016 Elsevier B.V. All rights reserved.
M. Kirchberger
This paper's central contribution is to examine how resilient labor
markets are when hit by a large-scale shock, and how the effects of the
shock work through labor markets in lower- or middle-income
countries with a high level of informality. My focus on understanding
the effect of natural disasters on labor markets, and wages in particular,
is motivated by the lack of social insurance in such countries and the
presence of credit constraints. The ability to insure against wage
volatility determines the extent to which it translates into consumption
volatility, and in turn affects welfare (Heathcote et al., 2013). When
social insurance is incomplete, wages become direct determinants of
welfare. Further, wages matter particularly when households deal with
large shocks: under credit constraints, income from wages is not only
important for stable consumption but also for replacing destroyed
assets. When a large proportion of individuals is self-employed, the
replacement of productive assets is important for enabling their
participation in the labor market. In order to optimally design
responses to large disasters, it is thus crucial to understand their
effects on wages.
The paper studies the effect of a natural disaster on the labor
market outcomes of individuals affected by the earthquake.
Throughout the paper, I condition on the employment outcomes of
an individual before the earthquake. The results should therefore
always be interpreted as, for example, the effect of the natural disaster
on individuals who were working in a particular sector or work
category at baseline.
I find that labor markets outcomes for individuals who were living
in earthquake-affected regions are remarkably resilient to such large
shocks, and on average wage growth was not significantly different.
There is some evidence that wage growth was higher for individuals
who were wage workers before the earthquake, but I do not find
differences in the effect of the earthquake according to whether
individuals were self-employed, firm owners, or government workers
before the disaster. Given that these employment categories have
different levels of job protection and regulations, this result is rather
surprising. However, I do find substantial heterogeneity in the sectoral
evolution of wages. Individuals who worked in the agricultural sector
before the earthquake in areas that were strongly affected by it
experienced significantly higher growth in earnings than the control
group. This suggests that local labor markets are reasonably segmented
and that mobility is limited. In the agricultural sector this is likely to be
the case, since land as a factor of production is immobile, many farms
are family farms, and it is fairly difficult to monitor labor in this sector.
A range of alternative measures of welfare (e.g., income and expendi-
tures) – as well as accounting for spillovers, or relying on alternative
identifying assumptions compared to my preferred specification such
as a fixed-effects specification – produces very consistent results. The
positive wage growth effects are not limited to a particular education
level or gender. I find that individuals who worked in agriculture and
social services, or were self-employed before the earthquake were
slightly more likely to be employed afterwards.
I examine two mechanisms for the significantly higher wage growth
for workers who were employed in agriculture before the earthquake:
first, I test whether the destruction of infrastructure led to increases in
the price of food, particularly in areas that were more reliant on
imports. Second, an increase in the demand for labor in sectors
producing non-tradables in the aftermath of the disaster possibly drew
workers out of the agricultural sector (the low-wage sector) into higher-
wage non-tradable sectors, leading to a rise in the marginal product of
labor and wages in the agricultural sector. I find evidence mainly for
the second mechanism. Employment in the agricultural sector con-
tracted and expanded in the construction sector in the aftermath of the
earthquake, resulting in greater wage growth for agricultural workers.
The paper contributes to an emerging literature on the effects of
natural disasters on various outcomes, such as consumption, income,
and migration. Studies of two earthquakes that struck El Salvador in
2001 find that the shock led to lower migration and a reduction in
41
Journal of Development Economics 125 (2017) 40–58
household income (Baez and Santos, 2008; Halliday, 2006; Yang,
2008). Premand (2008) finds that hurricane Mitch had moderate short-
term effects on consumption growth but no evidence of persistence. In
contrast to these papers, I focus on labor markets, in particular
heterogeneity across sectors and levels of formality.3 The research
most closely linked to this paper is by Belasen and Polachek (2008,
2009), and Gignoux and Menéndez (2016).4 Belasen and Polachek
(2008, 2009) investigate the labor market consequences of hurricanes
in Florida, exploiting differences in county-level earnings and employ-
ment rates, calculated from quarterly data. This paper differs metho-
dologically from their studies in three main ways. First, I focus on
individual-level outcomes using panel data. Second, I investigate the
effects of an earthquake rather than a hurricane. Third, I examine labor
markets in a lower-middle-income country. In a complementary study,
Gignoux and Menéndez (2016) examine the effects of earthquakes in
rural Indonesia, and find that households benefit from disasters in the
long run. My main contribution is to focus on shorter-term effects in
sectoral earnings differences. Further, in contrast to Gignoux and
Menéndez’ paper, (i) I concentrate on one large earthquake that was
followed by a fast and coordinated policy response, while they
investigate a number of different earthquakes of various sizes and
responses; (ii) I define my control group as individuals living in the
vicinity of urban areas in Java in 2000, while theirs comprises
individuals and households both from earlier years of the survey
(including the 1993 and 1997 rounds), as well as across Indonesia;
(iii) my baseline sample consists of individuals in rural and urban areas
in Java in 2000, while they use individuals who lived in rural areas in
1993.5
This paper also relates to a substantial body of development
economics literature that explores how shocks affect households along
a number of dimensions, including their ability to smooth consump-
tion, ex ante and ex post coping strategies, and the short- and long-
term effects of shocks on a range of outcomes such as consumption,
schooling, health, and child work (Dercon, 2004; Paxson, 1992;
Townsend, 1994; Udry, 1995).6 Jayachandran (2006) finds that
agricultural productivity shocks have stronger negative effects on wages
when workers are poorer, less mobile, and more credit constrained.
Mueller and Quisumbing (2010) find long-term negative effects of
floods on agricultural wages in Bangladesh. This paper focuses on the
labor market consequences of a non-weather-related large exogenous
shock in a developing country.
A growing number of studies contribute to the ongoing debate in
the macroeconomics literature about whether natural disasters harm
economic growth, foster it, only affect it under certain conditions, or
have no impact at all (Cavallo et al., 2013; Fomby et al., 2013;
Hochrainer, 2009; Hsiang, 2010; Loayza et al., 2012; Noy, 2009;
Skidmore and Toya, 2002; Strobl, 2011).7 My findings resonate
3
At the firm level, De Mel et al. (2012) study the effects of cash grants on the recovery
of Sri Lankan enterprises after the tsunami and find that they have significant effects on
retailers, but little effect on firms in the manufacturing or services sectors. Their main
interest is in studying profits and the capital stock of firms.
4
Some studies use hurricanes as natural experiments to investigate the impact of
migration on receiving labor markets, for example McIntosh (2008) and Silva et al.
(2010).
5
In my paper these could be original IFLS individuals or household members of split-
off households, as long as they are interviewed in at least two rounds of the survey.
6
Employment in the non-agricultural sector has been found to be an important
strategy for agricultural households to diversify their portfolio ex ante as well as ex post
(Kochar, 1999; Rose, 2001).
7
For a recent survey see Kellenberg and Mobarak (2011). The above-cited papers
(apart from Strobl, 2011) use data on natural disasters from the Emergency Disasters
Database (EM-DAT), maintained by the Centre for Research on the Epidemiology of
Disasters and estimate cross-country panel models in order to understand the macro-
economic effects of natural disasters. Strobl (2011) computes a proxy of local destruction
to estimate the effects of hurricanes on economic growth. Hsiang (2010) combines UN
National Accounts data with various spatial data such as wind speed and temperature,
and shows that temperature and cyclones have a significant effect on economic
production in the Caribbean and Central America.
M. Kirchberger
particularly with what Skidmore and Toya (2002) refer to as the
possibility that natural disasters cause Schumpeterian destruction.
Their cross-country framework demonstrates a positive correlation
between climate disasters and growth, which they argue is due to
growth in total factor productivity as well as greater human capital
investment. Studying the labor market in a micro setting, as I do in this
paper, is a step towards providing evidence on the underlying
mechanisms at play. Finally, this paper relates to research on the
multiplier effect of job creation in the tradable sector (Moretti, 2010),
on “Dutch disease” (Corden and Neary, 1982), aid and economic
growth (Rajan and Subramanian, 2011), the employment effects of
construction projects (Carrington, 1996), and the labor market effects
of oil price changes (Keane and Prasad, 1996; Kline, 2008).
My findings imply that large-scale destruction, coupled with a
substantial inflow of financial resources and a rapid government
response, has not significantly negatively affected wage growth in
Indonesia. On the contrary, agricultural workers (who had the lowest
wages) experienced faster wage growth, so the earthquake led to a
faster convergence of wages across sectors. The finding that economies
recover quickly from temporary shocks is in line with what Davis and
Weinstein (2002) and Miguel and Roland (2011) find for bombings in
Japan and Vietnam. I also find that the estimated IV results are
sometimes different from the OLS results, questioning use of damages
as these can be endogenous. The paper has two limitations due to data
constraints: (i) I am not able to separately identify the effects of
destruction and reconstruction and (ii) I can only look at short-run
effects (individuals were interviewed once, and, on average, two years
after the shock). Both issues are important to establishing a fuller
picture of the welfare effects and are thus topics for future research.
The paper is structured as follows. Section 2 describes the
Indonesian context and the data; Section 3 provides a conceptual
framework to outline the channels through which natural disasters
might affect local labor markets; Section 4 discusses identification and
estimation; Section 5 presents the results and explores mechanisms.
Section 6 concludes.
2. Context and data
To investigate the effects of natural disasters on local labor markets,
I study the effect of a large earthquake that hit Yogyakarta in Indonesia.
Indonesia is in one of the world's most seismologically active regions,
ranked third out of 153 countries in terms of absolute mortality risk
from earthquakes (United Nations Office for Disaster Risk Reduction,
2009). Since 2004, four seismic events have affected 6.7 million
people.8 Fig. 1 shows earthquakes with a magnitude greater than 5
on the Richter scale in the region between 2000 and 2008, as well as
the earthquake hazard (the probability that an earthquake with a
specific ground motion will occur in a given time frame at a particular
location). The map shows grid cells with a resolution of 2.5 min,
roughly 4.6 km at the equator. Each grid cell illustrates the deciles of
peak ground acceleration (the largest increase in velocity recorded on
the ground when an earthquake occurs) for areas that exhibit a 10%
probability of exceeding a peak ground acceleration of 2 m/s in a 50-
year period (Center for Hazards and Risk Research and Center for
International Earth Science Information Network, 2005).9 The map
illustrates that Indonesia is exposed to a large number of earthquakes,
and that despite differences in their predicted intensity, a large area of
the country is subject to a substantial risk of future earthquakes. The
impossibility of predicting earthquakes makes them an exogenous
event, which is a crucial element of my identification strategy.
The Yogyakarta earthquake struck on 27 May 2006 at 05:53:58 am
8
The four events are: the 2004 tsunami caused by an earthquake, the 2006 Yogyakarta
earthquake, the 2009 Southern Sumatra earthquake, and the 2007 Southern Sumatra
tsunami (EM-DAT: The OFDA/CRED International Disaster Database, 2014).
9
Values of 2m/s and less were excluded.
42
Journal of Development Economics 125 (2017) 40–58
with a magnitude of 6.3 on the Richter scale and a shallow depth of 10 m
below sea level (U.S. Geological Survey, 2012). It was among the most
costly natural disasters in developing countries in the past 10 years,
leading to US$ 3.1 billion in damage and losses (International Recovery
Platform, 2009). More than 5700 people were killed, and about 280,000
houses were destroyed (Java Reconstruction Fund, 2007). The Indonesian
government's response was swift and coordinated, and pooled donor
funding was channeled through the Java Construction Fund.10 By June
2007, about 80% of the affected houses had been repaired or replaced
(World Bank, 2012b). Recovery and reconstruction spending accounted
for about 30% of the total damage of the earthquake.11
More than half of the damage occurred to the housing sector,
followed by the productive12 and social sectors (Java Reconstruction
Fund, 2007). Large-scale infrastructure remained largely intact, and
80% of the damage to infrastructure was to provincial and district
roads. Damage and losses to the agricultural sector represented 10% of
the losses to the small and medium enterprise sector (BAPPENAS,
2006). According to a report by the International Recovery Platform
(2009), 92% of damage in the agricultural sector was due to production
losses. As part of a Rapid Livelihoods Assessment, the Food and
Agricultural Organization (2007) conducted a survey shortly after the
earthquake in a sample of 25 of the most-damaged or most-vulnerable
villages and found that about 40% of rice paddies, 23% of corn, and
73% of vegetables were damaged or remained unharvested after the
earthquake (rice farmers in Java tend to plant their second crop in
April and harvest in July).13
I combine data from several sources. To measure exposure to the
earthquake, I use data on reported destruction as well as an exogenous
measure of the level of destruction. Reported damages come from the
DesInventar database for Indonesia, maintained by the Indonesian
National Board for Disaster Management.14 The database contains
information on the type of disaster and geographical location, as well as
its effect on human life and damage to property and infrastructure. I use
the number of destroyed houses to measure the strength of the disaster,
and I use district-level population data from 2005 from Indonesia's
Statistical Agency to account for differences in population density across
districts. The Yogyakarta earthquake accounts for a significant proportion
of the deaths caused and houses destroyed by earthquakes in Indonesia
between 1972 and 2009 (48% and 27%, respectively).15
To ensure that my results are not driven by reporting bias and the
fact that the level of destruction might be correlated with unobserva-
bles that also affect labor markets, I also use data on the characteristics
of the ground shaking produced by the Yogyakarta earthquake from the
United States Geological Survey.16 In particular, I use the ShakeMap,
10
The fast execution of funds can be partially attributed to the timing of the
earthquake, which was just in time for mid-year budget revision. Consequently, US$
270million was spent by the end of October 2006.
11
The government of Indonesia disbursed US$ 610million in fiscal year 2006–2007;
provincial and local governments contributed US$ 140million, and contributions from
donors were estimated at US$ 107million (World Bank, 2012a).
12
The productive sector is defined as industry, enterprises, trade and tourism.
13
A report by the Java Reconstruction Fund (2007) suggests that damage to the
agricultural sector through lost crop yields amounted to US$ 2.5million. The destruction
of 100 irrigation units deprived about 5000 hectares of land of their water supply.
14
The full name is Badan Nasional Penanggulangan Bencana.
15
The number of houses negatively affected by the earthquake varies by report, from
154,000 houses destroyed and 260,000 damaged (BAPPENAS, 2006) to 280,000 houses
destroyed (Java Reconstruction Fund, 2007) and 270,000 houses heavily damaged
(International Recovery Platform, 2009). According to the DesInventar database, there
were 129,798 houses destroyed and 172,854 damaged.
16
There are different approaches in the literature to measuring the effect of earth-
quakes. Yang (2008) constructs two distance bands from the epicenter of the earthquake;
he defines “near” quakes as those within 100km of the epicenter of the first earthquake
and 50km of the epicenter of the second. “Middle distance” quakes are those within
125km of the first epicenter and 75km of the second epicenter. Halliday (2006)
constructs an index of destruction based on various damage measures. The methodology
employed in Baez and Santos (2008) is the most directly related to mine, as they exploit
the exogenous characteristics of the earthquake.
M. Kirchberger
Fig. 1. Earthquakes during 2000–2008, and Earthquake Hazard. Notes: The figure is produced using ArcGIS 10; earthquakes with a magnitude larger than 5 on the Richter scale from
the United States Geological Survey, and earthquake hazard from Center for Hazards and Risk Research and Center for International Earth Science Information Network (2005); Center
for International Earth Science Information Network (CIESIN), Columbia University; and International Bank for Reconstruction and Development/The World Bank.
which is an exogenous measure calculated based on peak ground
velocity and peak ground acceleration (Worden and Wald, 2016).
While an earthquake has only one magnitude and one epicenter, it
produces a range of intensities in the surrounding area.17 The
ShakeMap shapefile indicates the instrumental intensities of an earth-
quake using the modified Mercalli intensity scale. Fig. 2 zooms into
Java and shows the epicenter of the earthquake, overlaying the two
earthquake measures; the different colors indicate the level of destruc-
tion caused by the earthquake in each district, ranging from some
destruction (yellow) up to 78,622 houses destroyed (dark red). The
figure illustrates that the contours for higher instrumental intensity
correlate with the level of reported destruction.18 My data on indivi-
duals come from the IFLS, a large-scale panel household survey
conducted in 1993, 1997, 2000 and 2007. Since it is the only large-
scale individual-level longitudinal survey available in Indonesia, it is
suitable to study the dynamic behavior of individuals. The initial
sample includes 321 communities and is representative of 83% of the
Indonesian population living in 13 of the country's 26 provinces.19
With a re-contact rate in 2007 of 93.6% of the original IFLS 1 (1993)
households, it follows panel members equally well or better than
surveys in developed countries (Strauss et al., 2009).20
17
For example, the Richter scale measures the magnitude of the earthquake at its
epicenter. The modified Mercalli scale or the Rossi-Forrel scale are commonly used to
measure the intensity of an earthquake in the vicinity of the epicenter.
18
Appendix A discusses the advantage of using the ShakeMap as opposed to the
distance to the epicenter to measure the effect of the earthquake.
19
Indonesia's administrative levels are provinces (provinsi or propinsi), which are
divided into districts that are further divided into subdistricts. Districts can be cities
(kota) or regencies (kabupaten). For the purposes of this study, cluster and community
refer to the 321 original IFLS communities plus the communities of mover households.
20
Particularly when studying the consequences of natural disasters, a low attrition
rate is a pre-requisite.
43
Journal of Development Economics 125 (2017) 40–58
In this study I use data for individuals aged 20–55 in 2000 who
were interviewed between July and December 2000 and then again
between November 2007 and July 2008. Given the vast size of
Indonesia and its heterogeneity in terms of geography, income, and
population density, it would not be suitable to use all individuals of the
IFLS sample as a control group. I take advantage of the fact that the
IFLS collected the GPS coordinates of survey clusters by spatially
linking data on the severity of the earthquake with an individual's
location. The earthquake struck very close to the city of Yogyakarta, so I
define my sample as individuals living within a Euclidean distance of
5 km of cities with a population of more than 300,000 people on the
island of Java in 2000. This approach is similar in spirit to that used by
Deryugina et al. (2014); they examine the effect of Hurricane Katrina
on residents in New Orleans and use individuals from a set of control
cities in the United States. Fig. 3 illustrates for the original IFLS
communities the treatment and control clusters that fall into this
radius by green (light) circles, compared to the excluded clusters, which
are denoted by black triangles. Appendix A explains in detail how I use
ArcGIS to link the ShakeMap with the household data to construct
treatment and control groups.
Another advantage of the IFLS is that it contains a detailed labor
market module that asks respondents about employment in both the
formal and informal sectors. The basis for computing wages is formed
by the net salary reported for a respondent's primary job. Wages for
privately employed individuals and government employees are mea-
sured as last month's salary including the value of all benefits. For self-
employed individuals, wages are computed using last month's net
profits.
Following Strauss et al. (2004), I compute hourly wages on the basis
of monthly reported earnings divided by the approximate total number
of hours worked per week, multiplied by 4.33.21 If the individual only
reported yearly wages, I convert them to monthly wages by dividing
M. Kirchberger Journal of Development Economics 125 (2017) 40–58

Fig. 2. Yogyakarta Earthquake, 27 May 2006. Source: ArcGIS 10; data from the U.S. Geological Survey and DesInventar. The numbers indicate the modified Mercalli intensity scale of
the earthquake at different locations. Darker (red) shades reflect higher levels of destruction. (For interpretation of the references to color in this figure caption, the reader is referred to

Fig. 3. Treatment and control clusters. Source: ArcGIS 10; data from the U.S. Geological Survey and IFLS. Green (light) circles represent locations of treatment and control clusters and
black triangles represent excluded clusters. (For interpretation of the references to color in this figure caption, the reader is referred to the web version of this paper.)

annual wages by the number of weeks worked and multiplying them by
4.33.22 I restrict my sample to individuals with positive earnings in
2000 and use the change in earnings between 2000 and 2007 (as a
percent of earnings in 2000) as the dependent variable, winsorizing at
the 1st and 99th percentiles.23 This leaves me with a sample of 4252
individuals in treatment and control districts who have positive wages
in 2000 and for whom I have complete information for 2000 and 2007;
when I look at the number of hours worked, my sample is slightly
larger (4327 individuals).24 Following Thomas et al. (1999) I use a
province-specific price deflator that is based on the price indices
reported by Indonesia Statistics (BPS25) for 45 cities in Indonesia
(43 cities until 2003), matching the BPS cities to the IFLS provinces
and using a simple average of the price indices for provinces with more
than one city.26 All wages are expressed in 2007 Indonesian Rupiah. I
define an individual as employed if s/he: had a salaried job and worked
full time when the interview was conducted, worked at least 1 h in the

21
I top-code individuals who reported working more than a total of 126h per week to
126 (assuming a maximum work load of 18h per day for 7 days a week).
22
The questionnaire is designed such that individuals are first asked about last
month's salary (if the respondent is a private worker or government worker) or net profit
(if the respondent is self-employed), and then about last year's income. About 7% of
respondents only report yearly wages. The differential reporting is likely to reflect annual
accounting cycles, as more than three-quarters of those only reporting yearly income are
self-employed. The results are robust to only using data for individuals with non-missing
monthly wages.
23
The results are robust to both trimming outliers and including them.
24
These individuals live in 492 communities (out of which 144 form part of the
original IFLS communities in 1993), and across 72 districts.
25
The full name is Badan Pusat Statistik.
26
Thomas et al. (1999) construct an alternative measure of inflation based on the
price data collected in the IFLS community questionnaire and find that rural inflation
was 5% higher than urban inflation; therefore, they decide to further inflate prices for
rural residents. Given that the period between 2000 and 2007 experienced a far more
stable price environment than pre-crisis, I only use the BPS price data. I take first
differences to account for location-specific, time-invariant effects and include a dummy
variable if the household lives in an urban area to account for differential wage growth.

44
M. Kirchberger
last week, or has a salaried job and did not work last week.
Over the past 20 years, the Indonesian labor market has gone
through a number of phases. The 1990s, and before the Asian crisis in
1997, were marked by rising employment and wages and a shift of the
workforce out of agriculture. Wages dropped sharply in the aftermath
of the crisis, and since then employment and wage growth have been
moderate, with a significant portion of the labor force employed in the
informal sector. Indonesia's labor market is among the region's (and
the world's) most inflexible, with hiring and firing regulations further
tightened in the 2003 Manpower Law. About 63% of the employed
workforce works in the informal sector, and about 20% of workers in
the formal sector report working with a contract (World Bank, 2010).27
Table 1 presents some basic descriptive statistics of the sample at
baseline in 2000. While I use the continuous measure of earthquake
destruction in the empirical analysis, for ease of exposition I divide
individuals into two groups here: treated individuals who reside in
districts with some earthquake damage compared those in districts
with no earthquake damage in 2007. I also show the p-value of a t-test
of equality of means between the treatment and control groups.
The average respondent was 35 years old in 2000. Slightly more
than half of the sample is male, and 50–60% of the sample has at least
secondary or tertiary education; about 60% of the sample lives in areas
that are classified as urban. More than one-third of the respondents are
self-employed in 2000, and half are private workers, followed by
government workers and firm owners. About 50% of the sample
worked in commercial and social services, and roughly one-fifth
worked in the agricultural sector. Wages are highest for government
workers and firm owners in 2000. Wages also differ substantially across
sectors: workers in the social services sector have the highest wages,
followed by those in the commercial services and construction sec-
tors.28 Private workers and firm owners work the most hours, followed
by commercial services and construction sector workers.
While the treatment and control groups are largely balanced in the
allocations across employment categories and sectors, and in terms of
baseline wages across categories and sectors, Column (4) illustrates
that they still differ along several observable characteristics; in other
words, I do not have a perfect experiment. Most notably, the treatment
group is slightly older, has a higher proportion of women, is more
educated, has fewer private sector workers, a higher proportion of self-
employed workers, and more workers in construction and fewer in
manufacturing. Individuals in the treatment group work, on average,
fewer hours – particularly self-employed, agriculture, and manufactur-
ing workers. One worry is that, in addition to differences in observable
characteristics, there are also differences in unobservable character-
istics. For example, if the most productive individuals move to areas
with minimal earthquake probability, the productivity of individuals
affected by the earthquake is lower than in “safe” areas. Unobserved
productivity would then be negatively correlated with the earthquake; if
productivity affects wage growth, I would falsely attribute lower wage
growth in affected areas to the earthquake. As Fig. 1 shows, a large area
of Indonesia is exposed to a substantial risk of earthquakes; the
Yogyakarta earthquake hit an area that does not have the highest
earthquake risk.29 I have a twofold strategy to deal with differences in
observable characteristics: first, I control for these characteristics in all
27
For a detailed analysis of the Indonesian labor market, see World Bank (2010).
28
There is substantial overlap between categories of employment and sectors. In
2000, slightly more than half of agricultural workers were self-employed, and the other
big group was wage workers. Almost all workers in the construction sector are wage
workers. About 17% of workers in the manufacturing sector are self-employed, and 79%
are wage workers. Employment in commercial services follows the opposite pattern: 60%
of workers are self-employed, and 35% are wage workers. The largest group in social
services is wage workers with 53%, followed by government workers with 25%, and self-
employed with 20%. Firm owners comprise about 2% of each of these categories.
29
That is, the location of the Yogyakarta earthquake is in an area that does not fall into
the highest deciles of peak ground acceleration values for areas that exhibit a 10% chance
of exceeding peak ground acceleration of 2m/s in a 50-year-period.
45
Journal of Development Economics 125 (2017) 40–58
specifications; second, I use inverse propensity score weights obtained
from propensity scores by matching on these characteristics.
Differences in median levels of income and median growth are
illustrated in Appendix Tables B.1 and B.2. I show these statistics, for
both my estimation sample – which is based on individuals with
positive wages in 2000 and all individuals in 2007 (positive or zero
wages) – and for individuals with positive wages in both rounds. Table
B.1 shows that government workers enjoy the highest wages in both
years, about three to more than four times the hourly wages of self-
employed and wage workers and 24–70% more than firm owners.
Given that firm owners work about 47 h per week and government
employees work 39 h per week, monthly wages are more similar for
government workers and firm owners, but there is still a 10–34%
difference. Self-employed workers have the lowest level of wages in
both rounds, and the gap between the wages of self-employed and wage
workers has widened. Columns (4) and (5) show median growth rates
of the log of hourly and monthly wages, where the top panel conditions
on the employment category in 2000 and the bottom panel conditions
on the employment category in 2007. Government workers enjoyed the
highest growth in hourly wages, followed by private sector workers and
firm owners. Self-employed workers had either very moderate growth
or negative growth in the period between 2000 and 2007. Table B.2
shows that differences in median hourly and monthly earnings are less
pronounced across sectors. In both 2000 and 2007, employees in the
social services sector had the highest hourly and monthly wages,
followed by the construction, manufacturing, commercial services,
and agricultural sectors. Median wage growth was lowest in the
agricultural sector and highest in the social services sector, which is
where 82% of government employees work.
3. Conceptual framework
This section sets out a simple framework outlining the effects a
natural disaster can have on local labor markets. It combines
approaches from the labor economics literature on local labor markets
(Moretti, 2010, 2011), work on sectoral labor market dynamics
(Carrington, 1996; Keane and Prasad, 1996; Kline, 2008), and the
predominantly macro-focused literature on “Dutch disease” types of
effects (Corden and Neary, 1982; Corden, 1984; Collier and Gunning,
1999).
I consider the effect of a destructive natural disaster on local labor
markets. I assume that the natural disaster is a rapid-onset event such
as a hurricane or an earthquake, which has an immediate effect that
wears off fairly quickly.30 Neither firms nor workers can predict the
event. Therefore, firms cannot ex ante expand or contract, or change
their capital–labor ratios in order to reduce adjustment costs once the
disaster strikes. I first look at the direct effects of a disaster on the
demand for and supply of labor. I then examine how the effects of the
disaster on physical capital might affect the labor market. Finally, I
examine how the disaster could differentially affect sectors and
categories of employment.
A most immediate and direct effect of an earthquake is a decrease in
both labor supply and demand due to deaths and injuries. Depending
on the relative strength of these shifts, and holding capital constant,
this could either increase or decrease wages. Given the relatively
limited number of deaths caused by the Yogyakarta earthquake as a
proportion of the total population and the substantial level of un-
employment in Indonesia, one would not expect a strong wage
response to a decrease in labor supply.31 During the reconstruction
30
The opposite is what the disaster literature refers to as “slow-onset disasters” such
as droughts (Benson and Clay, 2004). Potential behavioral responses by individuals and
governments are very different for these two types of disasters.
31
In the 12 districts that recorded the number of houses destroyed by the Yogyakarta
earthquake, the number of deaths accounted for 0.05% of the total population of these
districts in 2005.
M. Kirchberger Journal of Development Economics 125 (2017) 40–58

Table 1
Baseline characteristics.

Treatment Control p-Value Definition

Basic characteristics
Age 36.372 35.266 0.003 Age of respondent in 2000
Gender 0.564 0.601 0.062 Male=1, Female=0
Primary 0.345 0.420 0.000 =1 if highest level of school attended is elementary school, Islamic elementary school (Madrasah Ibtidaiyah) or
Islamic school (Pesantren)
Secondary 0.447 0.412 0.069 =1 if highest level of school attended is junior/senior high, or Islamic junior/senior high school (Madrasah
Tsanawiyah, Madrasha Aaliyah)
Tertiary 0.170 0.114 0.000 =1 if highest level of school attended is university education
Urban 0.583 0.655 0.000 =1 if household lives in an urban location
Self-employed 0.372 0.360 0.537 =1 if self-employed, self-employed with unpaid family worker/temporary worker and casual workers
Firm owner 0.040 0.015 0.000 =1 if self-employed with permanent worker(s)
Government worker 0.121 0.078 0.000 =1 if government worker
Private worker 0.467 0.547 0.000 =1 if private worker
Agriculture 0.174 0.158 0.274 =1 if individual works in agriculture, forestry, fishery and hunting
Construction 0.111 0.064 0.000 =1 if individual works in construction, mining, electricity and gas, water
Manufacturing 0.168 0.220 0.002 =1 if individual works in manufacturing
Commercial services 0.272 0.304 0.091 =1 if individual works in wholesale, retail restaurants and hotels; transportation, storage and communications;
finance, insurance, real estate or business services
Social services 0.274 0.254 0.270 =1 if individual works in social services
Wages 6155.681 5404.457 0.272 Hourly wages
Hours worked 42.385 45.353 0.000 Hours worked in primary occupation

Baseline hourly wages

Self-employed 7993.241 6125.520 0.223 Wage for self-employed, self-employed with unpaid family worker/temporary worker and casual workers
Firm owner 8743.485 21,060.986 0.270 Wage for self-employed with permanent worker(s)
Government worker 8548.304 8305.033 0.683 Wage for government worker
Private worker 3851.157 4089.660 0.652 Wage for private worker
Agriculture 3395.423 4081.752 0.411 Wage for individual working in agriculture, forestry, fishery and hunting
Construction 6021.889 4097.119 0.351 Wage for individual working in construction, mining, electricity and gas, water
Manufacturing 5404.538 4229.892 0.266 Wage for individual working in manufacturing
Commercial services 6569.775 5767.599 0.676 Wage for individual working in wholesale, retail restaurants and hotels; transportation, storage and
communications; finance, insurance, real estate or business services
Social services 8017.299 7137.402 0.382 Wage for individual working in social services

Baseline hours worked

Self-employed 40.688 45.075 0.009 Hours worked of self-employed, self-employed with unpaid family worker/temporary worker and casual workers
Firm owner 43.000 47.654 0.341 Hours worked of self-employed with permanent worker(s)
Government worker 38.328 39.391 0.457 Hours worked of government worker
Private worker 44.746 46.333 0.117 Hours worked of private worker
Agriculture 33.178 38.294 0.003 Hours worked of individual working in agriculture, forestry, fishery and hunting
Construction 47.590 48.201 0.723 Hours worked of individual working in construction, mining, electricity and gas, water
Manufacturing 41.849 46.551 0.003 Hours worked of individual working in manufacturing
Commercial services 50.078 50.426 0.852 Hours worked of individual working in wholesale, retail restaurants and hotels; transportation, storage and
communications; finance, insurance, real estate or business services
Social services 39.159 42.057 0.066 Hours worked of individual working in social services
N 745 3507

Notes: The table shows average baseline characteristics for the treatment and control groups, and tests equality of the means. Treated individuals are those residing in districts with some
reported earthquake damage; control individuals reside in districts without damage. The average modified Mercalli intensity is 4.51 (s.d.=1.25) and the average proportion of houses
destroyed by the earthquake is 0.007 (s.d.=0.023).

period, inflows of aid money are expected to increase the demand for
local labor, as long as at least some of the labor employed to deliver
goods and services is local.
Alongside the destruction of human lives, earthquakes also destroy
physical capital such as private and public buildings as well as
equipment and infrastructure, such as roads and bridges, thereby
reducing the physical capital stock. How this affects the demand for
labor depends on the scale of destruction as well as the substitutability
between capital and labor in the production process. For example, if a
firm has had its machines destroyed but can substitute machinery with
labor to some extent, this would increase the demand for labor.
Horwich (2000) studies the aftermath of the Kobe earthquake in
Japan and concludes that as long as human capital remains, production
processes will be re-optimized, for example by relying on higher levels
of labor or energy.32 Yet if capital and labor are perfect complements,
the drop in the capital stock will decrease the demand for labor. In the
reconstruction phase the capital stock will be rebuilt, which will lead to
an increase in the demand for structures and equipment. If labor is a
complement to capital in the reconstruction of the capital stock, the
accelerated reconstruction activity will exert an upward shift in labor
demand.33 Given the characteristics of the Indonesian labor market
presented in the previous section, it is also important to think through
the effects that a natural disaster could have on different employment
categories. Informal workers might suffer greater losses from the
shock, as they lack employment protection and credit constraints
might delay the replacement of productive assets.
The effects are also likely to differ across sectors. I would expect
recovery efforts to be concentrated in the construction and service
sectors. If labor is a complement to capital, there will be an increased
demand for workers in these sectors. Whether this increases wages in
these sectors to facilitate shifts depends on the availability of sufficient
surplus labor. Due to the greater tradability of manufactured goods, I
would expect the manufacturing sector to suffer relatively more from

32
Workers could work longer hours, and energy could be used more intensively to
33
heat buildings despite holes in the structure. This is the equivalent of what Corden (1984) would refer to as the booming sector.

46
M. Kirchberger
supply disruptions due to the destruction of infrastructure in the
immediate aftermath of a disaster. On the other hand, it does not suffer
as much from the negative demand shocks caused by the earthquake as
some non-tradable goods (e.g., restaurants). Firms may substitute
capital with labor until their capital stock is restored. The destruction
of firms' capital stocks by a natural disaster might also affect their
optimal capital–labor ratios. For example, if the disaster raises firm
owners' expectations about the occurrence of similar events in the
future, this might lower the expected return on physical capital and
raise the expected return on human capital. When replacing their
capital stock, firms might upgrade to newer technologies that raise
workers' productivity.
Finally, the effect of a disaster on the agricultural sector is likely to
depend heavily on the level of destruction of harvests and agricultural
technology (such as irrigation canals) and infrastructure. If harvests are
destroyed, there will likely be a downward shift in the demand for labor
that would otherwise have been hired in the harvest season. The
destruction of infrastructure could also affect the tradability of goods
and services: goods and services that were previously tradable may
suddenly become non-tradable. I would expect this natural ”trade
restriction” to lead to downward pressure in food prices in surplus
areas, and upward pressure on prices in deficit areas (Dercon, 1995).
Given that wages are lowest in the agricultural sector, as discussed in
the previous section, it is likely that agricultural workers would be
willing to take up employment opportunities in other sectors if they
became available to them. In summary, the combined effect of the
destruction and reconstruction shock is theoretically ambiguous and is
therefore an empirical question.
4. Identification and estimation
I begin by outlining my methodology to investigate the effect of the
earthquake on labor market outcomes. My identification strategy relies
on the exogenous nature of the earthquake. I denote the pre-earth-
quake round of the survey (July–December 2000) as t=1 and the post-
earthquake round (October 2007–July 2008) as t=2. I use the following
baseline specification:
Δyi2 = α + β Di + X′i1 γ + S′i1 δ + Z′i1 θ + fi1 + fi2 + εi2 (1)
for individuals i = 1, …, N where
Δyi2 denotes the change in the outcome variable of interest (wa-
ges, employment status or hours worked) between 2000 and
2007,
Di is the time-invariant measure of destruction from the earth-
quake,
Xi1 is a vector of individual or household baseline characteris-
tics,
Si1 is a vector of dummy variables indicating the baseline sector
of employment,
Zi1 is a vector of dummy variables indicating the baseline cate-
gory of employment,
fi1 and fi2 are month fixed effects for t=1 and t=2, and
εi2 is an idiosyncratic shock.
To capture the effect of the earthquake shock, my main measure is
the number of houses destroyed per capita in 2005. While this is the
most direct measure of the effect of the earthquake, it has two
disadvantages: (i) it is only available at the district level and (ii) it
might be correlated with unobserved determinants of wage growth
through housing quality. For example, if housing quality is lower in
poorer areas (thus causing higher levels of destruction for a given
earthquake magnitude), and these areas have lower wage growth, then
I would falsely conclude that the earthquake led to lower wage growth.
47
Journal of Development Economics 125 (2017) 40–58
I therefore use the Mercalli measure of earthquake intensity as an
instrumental variable so that the first stage is34
Di = ρ0 + ρ1 Mi + X′i1 ρ2 + S′i1 ρ3 + Z′i1 ρ4 + fi1 + fi2 + vi (2)
where Xi1, Si1, and Zi1 are baseline characteristics from Eq. (1) and Mi is
the modified Mercalli measure of earthquake intensity. Individual and
household characteristics include age, age squared, education, urban
location, gender, and hours worked; sectoral dummy variables indicate
whether the individual is employed in agriculture, construction,
manufacturing, commercial services (base category), or social services;
category of employment dummy variables indicate whether the in-
dividual is self-employed (base category), a firm owner, employed by
the government, or in the private sector. I add month dummies for both
surveys in 2000 and 2007 to account for the fact that labor market
outcomes might depend substantially on the season, and therefore the
timing of the interview.35 I cluster standard errors at the level of the
community, and report the Kleibergen-Paap rk Wald F statistic, which
is robust to non- independent and identically distributed errors. Since
some of the characteristics outlined in Table 1 were not balanced, I
estimate a propensity score using baseline education, age, gender,
location, and sector and category of employment as matching variables
and then weight observations inversely proportional to their propensity
score, an approach adopted by Deryugina et al. (2014).36
Eq. (1) differs from a standard panel fixed effects model in that I
condition on lagged characteristics. I prefer this specification as my
main question is what the effects of a large shock are, conditional on
having been employed in a certain sector.37 The identifying assumption
in my model is that E (εit |Di , Xi1, Si1, Zi1) = 0 , so that earthquake
intensity, education, age, location, sector of employment, and category
of employment in 2000 are not correlated with unobservables deter-
mining wage growth between 2000 and 2007. It is not difficult to come
up with a violation of this assumption, for example, more-educated
individuals being more able to cope with shocks to wage growth, and
thereby having higher wage growth. However, I still find this assump-
tion more convincing than assuming that current individual labor
market characteristics are uncorrelated with current unobservables
determining wages once time-invariant individual characteristics are
controlled for, as would be assumed in a standard fixed-effects model. I
nevertheless show that the results are robust to estimating the model as
a fixed-effects specification. An immediate concern, given the labor
market structure, is whether earthquakes differentially affect self-
employed and wage-employed individuals. Further, workers previously
employed in certain sectors might be differentially affected. In addition
to controlling for employment categories and sectors, I therefore
estimate the effects of the earthquake for different sub-samples.
5. Empirical results and discussion
I start by presenting the base results, in which I investigate wage
growth for the full sample, and estimate separate regressions for
category and sector of employment sub-samples. Wages are the key
34
I am grateful to an anonymous referee for suggesting this approach.
35
The 2000 and 2007 month fixed effects also control for the time between the
earthquake and the interview. The median household was interviewed 638days after the
earthquake, with the first households interviewed 554days after the earthquake, and the
last households interviewed 787days after the earthquake. There is no difference in the
time between the earthquake and the interview for the median households in affected vs.
non-affected districts.
36
I re-estimate the propensity score for the sample I use in the regression looking at
hours worked, as I have 75 more individuals than in the wage regression who have non-
missing hours; overall, the results are not sensitive to the use of weights.
37
Controlling for baseline characteristics in Eq. (1) is particularly relevant for
variables that capture responses to the earthquake, such as sectoral shifts induced by
the earthquake that are correlated with wages, which biases my estimate of δ . It is similar
to what Angrist and Pischke (2008) call “bad controls,” in that controlling for employ-
ment sector in period 2, or taking differences in sectoral dummies, would capture part of
the response to the earthquake.
M. Kirchberger Journal of Development Economics 125 (2017) 40–58

Table 2
Changes in hourly wages as percent of baseline wages.

Pre-earthquake employment category

Full sample Self-employed Firm owner Government worker Private worker

(1) (2) (3) (4) (5)

Ordinary least squares

Destruction 3.478 0.867 −2.991 2.554 4.906***
(2.498) (4.737) (9.852) (4.550) (1.847)
Obs. 4252 1539 82 365 2266
R2 0.013 0.013 0.196 0.075 0.014

Instrumental variables
Destruction 2.665 −1.426 1.679 −10.285 6.076**
(3.129) (6.627) (13.756) (8.441) (2.567)
Obs. 4252 1539 82 365 2266
F-stat of excluded instrument 46.289 46.835 34.244 29.77 44.208
R2 0.013 0.013 0.193 0.063 0.014

First stage: instrumenting destruction with the modified Mercalli intensity measure
Mercalli intensity 0.015*** 0.015*** 0.017*** 0.013*** 0.015***
(0.002) (0.002) (0.002) (0.002) (0.002)
Obs. 4252 1539 82 365 2266
R2 0.592 0.616 0.671 0.509 0.602

Pre-earthquake employment sector

Agriculture Construction Manufacturing Commercial services Social services

(1) (2) (3) (4) (5)

Ordinary least squares

Destruction 12.669* 2.091 6.315* 1.023 2.157
(7.689) (2.331) (3.226) (4.997) (3.231)
Obs. 685 307 896 1268 1096
R2 0.034 0.014 0.033 0.012 0.012

Instrumental variables
Destruction 27.351*** 4.079 1.845 1.409 −1.408
(9.675) (3.017) (4.030) (6.327) (5.650)
Obs. 685 307 896 1268 1096
F-stat of excluded instrument 85.365 179.171 52.824 31.696 31.17
R2 0.028 0.014 0.031 0.012 0.011

First stage: instrumenting destruction with the modified Mercalli intensity measure
Mercalli intensity 0.018*** 0.02*** 0.016*** 0.014*** 0.012***
(0.002) (0.001) (0.002) (0.002) (0.002)
Obs. 685 307 896 1268 1096
R2 0.725 0.785 0.676 0.563 0.48

Notes: All models control for baseline age, gender, sector of employment, category of employment, and rural/urban location, and include month fixed effects for the interview month in
each survey round; robust standard errors in parentheses, clustered at the community level.
*
Significance at 10% level.
**
Significance at 5% level.
***
Significance at 1% level.

variable of interest in this paper, as they are a direct determinant of
welfare in the presence of credit constraints and when social insurance
is incomplete. Further, when faced with a large shock, wages are
important for insuring a stable consumption and replacing destroyed
assets. Given the large proportion of individuals that is self-employed,
replacing productive assets is crucial to ensuring continued participa-
tion in the labor market. I still test whether the earthquake affected the
employment or the number of hours worked. I proceed by presenting a
range of robustness tests, run a placebo experiment, consider potential
biases through migration and attrition, and explore heterogeneity with
regard to gender and education. I then discuss possible mechanisms
that may be driving the results.
5.1. Base results
Table 2 shows the effect of the earthquake on changes in hourly
wages as a percent of baseline wages. Column (1) of the upper panel
shows the complete sample, Columns (2)–(5) depict sub-samples for
pre-earthquake employment categories, and the lower panel shows
sub-samples for pre-earthquake employment sectors. I show the
ordinary least squares (OLS) results, followed by the second stage (as
outlined in Eq. (1)) and the first stage of the instrumental variables
estimation (as outlined in Eq. (2)), in which I instrument the propor-
tion of houses destroyed with the modified Mercalli intensity. The first
stages show that the Mercalli instrumental intensity is strongly
correlated with the reported destruction, and the F-statistic is always
above the conventional cut-off of 10. Using the full sample of workers,
Column (1) suggests that individuals who were living in areas affected
by the earthquake had, on average, statistically indistinguishable wage
growth from those living in the control locations. Somewhat surpris-
ingly, there do not seem to be differential effects for self-employed
workers, who presumably have less job security. The estimated
coefficient is negative, but not statistically different from zero in the
instrumental variables (IV) estimation. The only employment category

48
M. Kirchberger
for which I find significant effects is private workers: they had
significantly higher wage growth; the coefficient obtained in the IV
estimation is larger but less precisely estimated.
When comparing different employment sectors, the OLS and IV
results both suggest that workers who were employed in agriculture at
baseline in areas affected by the earthquake experienced significantly
higher wage growth than those who were not affected.38 The main
difference between the OLS and IV results is that the estimated
coefficient of the destruction variable for the sub-sample of agricultural
workers is larger in magnitude and more precisely estimated. This
could be due to the endogeneity of destruction, as well as to the larger
variation in the modified Mercalli measure, which has variation at the
community level, and not just at the district-level, for individuals
residing in original IFLS communities.
According to the IV estimates in Column (1) of the lower panel, a
one-percentage-point increase in the number of houses destroyed per
capita led to 27.4% higher wage growth for individuals who were
employed in agriculture before the earthquake.39 The results are very
similar when the Mercalli measure is used as the main destruction
measure instead of as an instrument. In addition to taking endogeneity
concerns into account, a further advantage of estimating the model as
an IV specification is that my main destruction measure is easily
interpretable.40
I next further explore whether there are differential patterns in
employment or hours worked for individuals who were affected by the
earthquake in order to understand adjustments on the extensive and
intensive margins. Table 3 uses the sample of workers with positive
wages in 2000 and explores whether the earthquake affected the overall
the probability of being employed in 2007. Overall, I do not find that
the earthquake affected employment. When looking at the employment
category and sector sub-samples, the IV estimation suggests that
individuals who were self-employed, and those working in the agri-
cultural or social services sector are more likely to still be employed
after the earthquake. The self-employed are likely to have to ensure
continued income to replace lost assets. The higher probability of
employment for workers who were employed in social services before
the earthquake would be consistent with the earthquake leading to a
higher demand for workers, for example, in the health sector.
Table 4 explores changes in the number of hours worked between
2000 and 2007 as a percentage of hours worked in 2000. Similar to the
wage regressions, I include individuals with zero hours worked in 2007.
The effect of the earthquake is positive for the full sample, but not
statistically different from zero. Individuals who are self-employed are
significantly more likely to experience a faster growth in their work
hours. I find that the change in work hours for construction sector
workers is 2.1% lower for those affected by the earthquake. Together
38
If I include province dummies along with sector sub-samples the results lose
significance, but this is due primarily to collinearity: all workers in Yogyakarta province
live in a district affected by the earthquake, and 16% of workers in Central Java province
live in a district that was affected by the earthquake.
39
The results are substantively identical if I use the number of houses destroyed
without dividing by the district-level population; I prefer to use houses destroyed per
capita to take population density into account. Since part of the effect of employment
category and sector might depend on the sector and category of employment before the
earthquake, I have also estimated the model underlying Columns (2)–(5) of the upper
panel omitting the control for baseline sectors of employment, and the model underlying
Columns (1)–(5) of the lower panel, omitting the control for baseline category of
employment; the results are very similar.
40
I have also estimated the model using total earnings from an individual's primary
job (not controlling for the number of hours worked); see Table C.1 in the Appendix. The
positive impact of the earthquake on wage growth for individuals who were employed in
the agricultural sector before the earthquake is even stronger when I use total monthly
earnings. The main difference when using total monthly earnings is that there is an
overall positive effect of the earthquake on earnings growth, and evidence that
individuals who were firm owners or private workers before the earthquake experience
higher wage growth. These are the individuals who worked the longest hours in 2000 (the
median hours worked is 48 for these two categories, compared to 42 and 39 for self-
employed (without employees) and government workers, respectively).
49
Journal of Development Economics 125 (2017) 40–58
with workers employed in the commercial services sector, construction
sector workers had the longest work hours before the earthquake. Work
hours also grew less for workers who were employed in commercial
services (but the effect is not statistically different from zero), suggest-
ing that there was a convergence in work hours across employment
sectors.
Table B.3 in the Appendix lists all explanatory variables of the IV
regressions for wage growth, employment, and hours worked (Column
(1) of the upper panel of Tables 2–4) except the dummy variables for
the month of the interview. While many of these variables are highly
correlated with labor market outcomes in levels, there is no a priori
reason to expect these coefficients to be significantly different from zero
in the differences specification. Men had, on average, higher wage
growth, were more likely to have been employed in both 2000 and
2007, and increased their work hours more than women. When looking
at sub-samples, the higher wage growth for men seems to be driven by
higher wage growth in the agricultural, manufacturing and social
services sectors. The probability of being employed in 2007 for
individuals who were employed in 2000 is higher for men across all
sectors; men increased their work hours substantially more than
women, particularly in the construction and manufacturing sectors.
Compared to individuals employed in the commercial services sector,
workers employed in agriculture were less likely, on average, to retain a
salaried job between 2000 and 2007. Individuals employed in social
services and those with tertiary education increased the number of
hours worked, on average, by 17% and 42%, respectively. Wage
workers were 3.9% more likely to retain their job, and had lower
increases in hours worked compared to self-employed workers.
5.2. Robustness tests
The main result so far is that earthquake-driven changes in wages
were largest for workers who were employed in the agricultural sector
in 2000. Table 5 presents the results of a number of robustness tests
related to spillovers between the treatment and control groups, the
measurement of wages in the agricultural sector, and the robustness of
the results to propensity score weighting. One concern is that the
results might be contaminated by spillovers between the treatment and
control groups. To test whether this biases the results, I exclude
individuals who live less than 120 km from the earthquake's epicenter
but in districts not affected by the earthquake, and the results are not
affected. Next, my main analysis uses monthly wages earned in the
primary sector of employment. This means individuals could be
adapting along either the intensive or extensive margins and monthly
wages could conceal that. Panel (II) uses wages from primary and
secondary sectors of employment as well as non-labor income as an
alternative test of whether this is driving the results. With this
aggregation of income sources, the effect of the earthquake on
individuals who were working in the agricultural sector is smaller but
still statistically significant at the 11% level.
A further concern is the measurement of wages in the agricultural
sector. The household questionnaire records the net profit earned from
farm businesses (or an individual's share of the profits if the business is
owned by multiple individuals); the individual-level questionnaire,
from which the wage data come, asks individuals to report their profits
at the individual level, but each respondent might also report the full
profit. This only biases my results if for some reason the reporting of
individual-level profits has increased for individuals who were affected
by the earthquake. Panel (III) uses total household expenditure as the
dependent variable.41 In credit-constrained environments, expenditure
and income are likely to be similar. The results illustrate that house-
holds in which the household head was employed in the agricultural
sector before the earthquake had significantly higher per capita
41
Similar to wages, I convert per capita expenditure to 2007 Rupiah.
M. Kirchberger Journal of Development Economics 125 (2017) 40–58

Table 3
Changes in employment.

Pre-earthquake employment category

Full sample Self-employed Firm owner Government worker Private worker

(1) (2) (3) (4) (5)

Ordinary least squares

Destruction −0.218 0.804** −0.058 1.318*** −0.735**
(0.249) (0.347) (0.994) (0.348) (0.322)
Obs. 4252 1539 82 365 2266
R2 0.122 0.153 0.456 0.234 0.119

Instrumental variables
Destruction 0.378 1.397** 0.326 0.615 −0.052
(0.436) (0.58) (1.151) (0.914) (0.547)
Obs. 4252 1539 82 365 2266
F-stat of excluded instrument 46.289 46.835 34.244 29.77 44.208
R2 0.121 0.152 0.455 0.232 0.117

First stage: instrumenting destruction with the modified Mercalli intensity measure
Mercalli intensity 0.015*** 0.015*** 0.017*** 0.013*** 0.015***
(0.002) (0.002) (0.002) (0.002) (0.002)
Obs. 4252 1539 82 365 2266
R2 0.592 0.616 0.671 0.509 0.602

Pre-earthquake employment sector

Agriculture Construction Manufacturing Commercial services Social services

Ordinary least squares

Destruction 0.365 −0.727* −0.658 −0.175 0.494
(0.621) (0.391) (0.466) (0.466) (0.473)
Obs. 685 307 896 1268 1096
R2 0.215 0.114 0.163 0.109 0.086

Instrumental variables
Destruction 1.487* 0.023 −0.106 −0.112 1.501*
(0.841) (0.504) (0.709) (0.677) (0.872)
Obs. 685 307 896 1268 1096
F-stat of excluded instrument 85.365 179.171 52.824 31.696 31.17
R2 0.212 0.108 0.162 0.109 0.082

First stage: instrumenting destruction with the modified Mercalli intensity measure
Mercalli intensity 0.018*** 0.02*** 0.016*** 0.014*** 0.012***
(0.002) (0.001) (0.002) (0.002) (0.002)
Obs. 685 307 896 1268 1096
R2 0.725 0.785 0.676 0.563 0.48

Notes: All models control for baseline age, gender, sector of employment, category of employment, and rural/urban location, and include month fixed effects for the interview month in
each survey round; robust standard errors in parentheses, clustered at the community level.
*
Significance at 10% level.
**
Significance at 5% level.
***
Significance at 1% level.

expenditure, which suggests that the positive effect on wages found in
the wage regressions is not simply an artefact of reporting. The final
panel shows the results without weighting individuals inversely pro-
portional to their propensity score.
I conduct a number of further robustness tests related to the
estimation of standard errors, identification assumptions, and variable
definitions. The results are briefly outlined here, and available in full in
Appendix C. I first estimate the results using Conley standard errors
instead of clustered standard errors. Second, following Leamer (1983)'s
suggestion, I show that my results are robust to different identifying
assumptions, such as those underlying a fixed-effects specification. I
then test the robustness of my results by changing the 50 km radius
around cities that defines my control group to 75 km. I also estimated
the results including a self-reported measure of whether the household
suffered death or major injuries due to an earthquake, controlling for
any other disasters the household reports, and including a variable
measuring the destruction of business and non-business assets,
medical costs, whether the respondent's house was damaged or
destroyed, how much assistance the household received, and how
many weeks the household was displaced as a result of the Yogyakarta
earthquake.42 I also used the full sample of individuals aged 15–85 and
the attrition-adjusted cross-sectional individual sampling weights
provided by the IFLS, which make the IFLS sample of individuals
representative of the 2007 population of individuals living in the
original 13 IFLS provinces. Table A.2 illustrates that, with a population
of about 11 million, Jakarta is the main outlier in terms of population
size in my set of control cities. When comparing baseline character-
istics, the sample from Jakarta does not seem to be the reason for the
unbalancedness in some of the covariates, but I still test whether my
results are affected when I exclude individuals living in Jakarta from
the control group. All these robustness tests show very consistent
42
With 7.7% of the sample reporting to have been severely affected by the Yogyakarta
earthquake, it is the only big earthquake reported in this period in my sample. Other
natural disasters that have been reported include 101 households in various districts
reporting a flood (including 58 in Jakarta and 22 in Central Java), and 32 households
reporting a fire, most of whom were living in Jakarta.

50
M. Kirchberger Journal of Development Economics 125 (2017) 40–58

Table 4
Changes in hours worked.

Pre-earthquake employment category

Full sample Self-employed Firm owner Government worker Private worker

(1) (2) (3) (4) (5)

Ordinary least squares

Destruction 0.634 3.019 0.368 1.423 −0.688
(1.028) (2.451) (5.798) (0.93) (1.125)
Obs. 4327 1581 82 369 2295
R2 0.033 0.041 0.278 0.112 0.026

Instrumental variables
Destruction 1.295 5.666** −0.266 0.836 −1.184
(1.202) (2.881) (7.117) (1.603) (1.335)
Obs. 4327 1581 82 369 2295
F-stat of excluded instrument 46.126 46.7 34.398 29.758 44.136
R2 0.033 0.04 0.278 0.112 0.026

First stage: instrumenting destruction with the modified Mercalli intensity measure
Mercalli intensity 0.015*** 0.015*** 0.017*** 0.013*** 0.015***
(0.002) (0.002) (0.002) (0.002) (0.002)
Obs. 4327 1581 82 369 2295
R2 0.592 0.615 0.671 0.51 0.602

Pre-earthquake employment sector

Agriculture Construction Manufacturing Commercial services Social services

(1) (2) (3) (4) (5)

Ordinary least squares

Destruction 1.584 −2.464*** 2.420 −0.151 0.364
(1.821) (0.573) (3.009) (1.733) (2.035)
Obs. 712 312 904 1282 1117
R2 0.017 0.089 0.049 0.034 0.04

Instrumental variables
Destruction 1.507 −2.082*** 3.510 −0.819 1.825
(2.253) (0.724) (3.084) (2.241) (2.923)
Obs. 712 312 904 1282 1117
F-stat of excluded instrument 82.131 178.879 53.59 31.414 30.521
R2 0.017 0.089 0.048 0.033 0.039

First stage: instrumenting destruction with the modified Mercalli intensity measure
Mercalli intensity 0.018*** 0.02*** 0.016*** 0.013*** 0.012***
(0.002) (0.001) (0.002) (0.002) (0.002)
Obs. 712 312 904 1282 1117
R2 0.719 0.785 0.678 0.559 0.481

Notes: All models control for baseline age, gender, sector of employment, category of employment, and rural/urban location, and include month fixed effects for the interview month in
each survey round; robust standard errors in parentheses, clustered at the community level.

*
Significance at 10% level.
**
Significance at 5% level.
***
Significance at 1% level.

results. Finally, Tables C.3–C.5 show the results of a placebo test in
which I check whether individuals who lived in areas struck by the
earthquake were on different trajectories before the earthquake by
looking at labor market outcomes between 1997 and 2000. Labor
market trajectories are largely similar for treatment and control
groups. Workers in the agricultural sector even experienced lower
wage growth between 1997 and 2000, suggesting that the estimated
effect of the earthquake is a lower bound.
Migration is a possible coping strategy when faced with a negative
shock. This could affect the results if individuals with either a higher or
lower wage growth profile migrate at different rates. Appendix C.3
examines migration and attrition in more detail. When individuals
were questioned in the migration section of the individual question-
naire in 2007, the three most frequently stated reasons for migration
were work related (34%), marriage (15%), and education (11%); only
0.33% of individuals gave natural disasters as a reason for migration.
However, individuals might move after a disaster and classify the move
as work-related rather than disaster-related. I therefore look directly at
the mobility of households. I find that households are less likely to
move if they were severely affected by the earthquake, similar to what
Halliday (2006) and Yang (2008) found for earthquakes in El Salvador.
Further, Table C.6 shows that I do not find differences in baseline
wages between individuals residing in households that moved from a
district that was affected by the earthquake to one that was unaffected.
Given the differential trend in wage growth between men and
women, I also explore whether there is heterogeneity in the effect by
gender or education level. Tables 6 and 7 show the IV results by gender
and by education level (higher education refers to secondary or higher
education). The gender and education sub-samples show that the
positive effect of the earthquake on wage growth for individuals
employed in agriculture at baseline is not limited to a particular
education level or gender. As only 21 women worked in the construc-

51
M. Kirchberger Journal of Development Economics 125 (2017) 40–58

Table 5
Robustness checks.

Pre-earthquake employment sector

Agriculture Construction Manufacturing Commercial services Social services

(I) Spillover (dropping individuals not affected by the earthquake residing < 120 km from the epicenter)
Instrumental variables
Destruction 27.929*** 3.785 1.862 1.227 −2.061
(9.928) (3.043) (4.026) (6.355) (5.689)
Obs. 657 296 871 1232 1084
F-stat of excluded instrument 86.255 179.462 53.273 31.748 31.181
R2 0.028 0.015 0.033 0.011 0.011

First stage: instrumenting destruction with the modified Mercalli intensity measure
Mercalli intensity 0.018*** 0.02*** 0.016*** 0.014*** 0.012***
(0.002) (0.001) (0.002) (0.002) (0.002)
Obs. 657 296 871 1232 1084
R2 0.717 0.778 0.677 0.563 0.48

(II) Total monthly earnings: primary+secondary job + non-labor income

Instrumental variables
Destruction 14.854 0.164 7.467 −3.812 8.154
(9.238) (3.088) (7.744) (5.146) (8.126)
Obs. 685 307 896 1268 1096
F-stat of excluded instrument 85.365 179.171 52.824 31.696 31.17
R2 0.012 0.034 0.036 0.02 0.035

First stage: instrumenting destruction with the modified Mercalli intensity measure
Mercalli intensity 0.018*** 0.02*** 0.016*** 0.014*** 0.012***
(0.002) (0.001) (0.002) (0.002) (0.002)
Obs. 685 307 896 1268 1096
R2 0.725 0.785 0.676 0.563 0.48

(III) Household expenditure, sub-samples for sector of household head

Instrumental variables
Destruction 8.221* 2.396 2.238 1.890 −3.879
(4.488) (1.660) (2.772) (2.530) (3.299)
Obs. 498 261 477 686 634
F-stat of excluded instrument 69.559 157.009 45.178 27.161 25.314
R2 0.051 0.053 0.049 0.01 0.038

First stage: instrumenting destruction with the modified Mercalli intensity measure
Mercalli intensity 0.017*** 0.02*** 0.016*** 0.013*** 0.011***
(0.002) (0.002) (0.002) (0.002) (0.002)
Obs. 498 261 477 686 634
R2 0.721 0.791 0.653 0.55 0.469

(IV) Drop propensity score weighting

Instrumental variables
Destruction 28.759*** 5.572* 0.849 −0.562 −1.830
(8.650) (3.269) (3.953) (5.541) (5.298)
Obs. 685 307 896 1268 1096
F-stat of excluded instrument 68.984 146.542 47.21 36.076 31.347
R2 0.025 0.02 0.029 0.017 0.008

First stage: instrumenting destruction with the modified Mercalli intensity measure
Mercalli intensity 0.017*** 0.019*** 0.016*** 0.014*** 0.012***
(0.002) (0.002) (0.002) (0.002) (0.002)
Obs. 685 307 896 1268 1096
R2 0.689 0.755 0.647 0.563 0.479

Notes: All models control for baseline age, gender, sector of employment, category of employment, and rural/urban location, and include month fixed effects for the interview month in
each survey round; robust standard errors in parentheses, clustered at the community level.
*
Significance at 10% level.
**
Significance at 5% level.
***
Significance at 1% level.

tion sector at baseline, I cannot estimate the effect of the earthquake for
this sub-sample.43
Gignoux and Menéndez (2016) find negative income effects for the
self-employed 2–5 years after an earthquake but positive effects 6–
12 years afterwards. One explanation for the faster recovery of
individuals in my sample could be the fast and coordinated response
to the disaster, linked to the fact that Yogyakarta was prepared due to
43
Gignoux and Menéndez (2016) and Anttila-Hughes and Hsiang (2013) highlight the
dynamic effects of natural disasters. I have also explored whether there are dynamic
effects by estimating the effect of the earthquake for two sub-samples: individuals who
were interviewed less than the median number of days since the earthquake and those
who were interviewed more than the median number of days since the earthquake. I do
not find differential effects, which is not surprising considering the limited variation in
the time since the earthquake. My focus on one large shock and two rounds of surveys
(before and after) is less conducive to studying the dynamic effects than, for example, the

52
M. Kirchberger Journal of Development Economics 125 (2017) 40–58

Table 6
Heterogeneity in wage growth by gender.

Pre-earthquake employment sector

Agriculture Construction Manufacturing Commercial services Social services

Men
Instrumental variables
Destruction 33.531** 3.405 2.299 7.547 −3.359
(16.031) (2.900) (6.431) (10.361) (9.403)
Obs. 469 286 481 657 636
F-stat of excluded instrument 69.259 177.4 42.625 24.34 26.934
R2 0.022 0.018 0.035 0.031 0.023

First stage: instrumenting destruction with the modified Mercalli intensity measure
Mercalli intensity 0.017*** 0.02*** 0.016*** 0.013*** 0.011***
(0.002) (0.001) (0.002) (0.003) (0.002)
Obs. 469 286 481 657 636
R2 0.721 0.798 0.656 0.554 0.461

Women
Instrumental variables
Destruction 14.560* n.a.a 1.272 −7.479 0.177
(7.924) (3.712) (7.619) (7.481)
Obs. 216 21 415 611 460
F-stat of excluded instrument 121.537 54.685 39.105 32.623
R2 0.016 0.025 0.024 0.021

First stage: instrumenting destruction with the modified Mercalli intensity measure
Mercalli intensity 0.019*** n.a.a 0.017*** 0.014*** 0.012***
(0.002) (0.002) (0.002) (0.002)
Obs. 216 21 415 611 460
R2 0.781 0.701 0.585 0.521

Notes: All models control for baseline age, gender, sector of employment, category of employment, and rural/urban location, and include month fixed effects for the interview month in
each survey round; robust standard errors in parentheses, clustered at the community level.
*
Significance at 10% level.
**
Significance at 5% level.
***
Significance at 1% level.
a
There are only 21 women in the construction sector.

the neighboring volcano Mount Merapi, its central location relative to
less accessible areas of Indonesia, and government preparedness after
the 2004 tsunami recovery. In their paper, earthquakes are located
across almost all of Indonesia, have different magnitudes and have
different recovery efforts. Further, Gignoux and Menéndez (2016)
estimate a fixed-effects model, so it is possible that individuals who
had a better adaptive capacity shifted out of agriculture in response to
the earthquake. I condition on individuals' employment sector before
the earthquake. When I estimate a fixed-effects specification, the wage
growth effects are lower as well. Finally, another main difference is that
their sample is drawn from 1993 IFLS members living in rural
communities, while mine is from all individuals present in both the
2000 and 2007 rounds in both rural and urban clusters, who could be
either original IFSL members or members of split-off households.
5.3. Mechanisms
I now explore in more detail why I might find an effect on
agricultural wages. Profit-maximizing firms will set wages equal to a
worker's marginal product of labor multiplied by the price. Higher
wage growth could be due to either (i) higher agricultural prices or (ii)
an increase in the marginal product of labor. I now investigate these
channels in turn.
5.3.1. Increase in the prices of agricultural goods
The price of agricultural products can increase after a disaster due
to the disruption in trade, the destruction of harvests, or damage to
(footnote continued)
setup of Gignoux and Menéndez (2016).
irrigation units; to explore the effect of trade disruptions on prices, I
borrow ideas from Samuelson (1952)'s discussion of spatial price
equilibrium. I then test whether there is any evidence in the data that
these channels contributed to faster wage growth for agricultural
workers.
Assume that there are communities with excess demand for rice
(net buyer communities) as well as those that have excess supply (net
seller communities), and that the price for importer communities is
equal to the producer price plus a transport cost. The earthquake might
increase transport costs for affected communities, and may also cause
some communities to increase their imports due to crop losses.44 If
communities continue to trade, I expect prices to increase for net buyer
communities to reflect the increased transport costs caused by the
infrastructure destruction. For net seller communities, the effect on
prices is ambiguous and ultimately an empirical question: infrastruc-
ture destruction raises the cost of exporting goods, exerting downward
pressure on local prices; yet the downward shift in supply due to the
destruction of harvests puts upward pressure on local prices.
Ideally I would have consumption, production, and price data for a
range of goods and services. In the dataset, however, rice is the only
good for which I have information on the level of prices per kilogram in
both survey rounds, as well as data on household level production and
consumption. To proxy for the prices of agricultural goods, I therefore
use information on rice prices from the community questionnaire of
the IFLS survey.45 As opposed to the binary distinction between net
44
The framework could also be thought of as a two-period model in which
communities can shift from being net buyers to net sellers because of the destruction
of the harvest, and vice versa. Given that a community's net purchasing position after an
earthquake might itself be a choice, I focus on price changes conditioning on a
community's position before the earthquake.

53
M. Kirchberger Journal of Development Economics 125 (2017) 40–58

Table 7
Heterogeneity in wage growth by education.

Pre-earthquake employment sector

Agriculture Construction Manufacturing Commercial services Social services

High education (secondary or tertiary)

Instrumental variables
Destruction 27.700** 12.739 −1.265 5.367 0.948
(12.400) (8.363) (6.873) (7.972) (6.823)
Obs. 151 129 550 665 812
F-stat of excluded instrument 56.221 116.767 36.047 27.532 26.704
R2 0.009 0.085 0.047 0.03 0.015

First stage: instrumenting destruction with the modified Mercalli intensity measure
Mercalli intensity 0.016*** 0.019*** 0.014*** 0.012*** 0.011***
(0.002) (0.002) (0.002) (0.002) (0.002)
Obs. 151 129 550 665 812
R2 0.65 0.744 0.597 0.511 0.451

Low education (primary, adult, or less)

Instrumental variables
Destruction 26.674*** 3.332 4.730 −4.532 −4.337
(10.264) (4.012) (5.370) (10.464) (12.023)
Obs. 534 178 346 603 284
F-stat of excluded instrument 97.525 145.59 77.454 33.688 24.584
R2 0.032 0.047 0.024 0.01 0.018

First stage: instrumenting destruction with the modified Mercalli intensity measure
Mercalli intensity 0.019*** 0.02*** 0.019*** 0.016*** 0.012***
(0.002) (0.002) (0.002) (0.003) (0.002)
Obs. 534 178 346 603 284
R2 0.77 0.817 0.787 0.645 0.531

Notes: All models control for baseline age, gender, sector of employment, category of employment, and rural/urban location, and include month fixed effects for the interview month in
each survey round; robust standard errors in parentheses, clustered at the community level.
*
Significance at 10% level.
**
Significance at 5% level.
***
Significance at 1% level.

seller and net buyer communities, I can look at a continuous variable Since I need at least a reasonable sample of households per cluster
that captures the amount of rice a community is importing to test to estimate aggregate production, I exclude communities that are not
whether prices rise as a community becomes more reliant on imports.46 original IFLS communities (which will have few households living there
I use the household questionnaire to determine the proportion of rice a in each round), which results in a sample of 141 communities. I then
community imports. I take farmers who record rice as the most estimate the effect of the earthquake on the change in the price of rice
valuable crop that the household farm produced for the market or for using the following regression:
home consumption, and aggregate the value of total production
Δlnpj 2 = π0 + π1 Hj + π2 Ij1 + π3 Hj*Ij1 + π4 Xj1 + fi1 + fi2 + εj 2 (3)
generated by the farm business (including produce for own consump-
tion and giving to others) in the last 12 months at the community
for community j = 1, …, N , where
level.47 To measure total consumption, I aggregate the value of house-
holds' yearly consumption of rice (home-produced or bought from the
p is the price of rice per kilogram,
market) at the community level. This allows me to compute the
H is a measure of destruction from the earthquake,
proportion of rice a community imports.48
I is the proportion of rice a community imported in 2000,
X is the suitability of land for rice production,
fi1 and fi2 are month fixed effects for t=1 and t=2, and
(footnote continued) εj2 is an error term.
45
In 2000, up to three markets or sales outlets were visited to collect data on prices of
basic goods. In 2007, interviewers collected prices from local markets and shops/stalls,
and up to three informants were questioned. For rice prices, the 2007 questionnaire
records prices for high-, average-, and low-quality rice. Since I only have information on Another important factor to consider when discussing rice prices in
average-quality rice in 2000, I use this variable to calculate prices. To calculate the price this period is the Indonesian government's January 2004 import ban
per kilogram, I multiply the price of a liter of rice by (1/0.89) and the price in grams by
on rice (McCulloch, 2008), and its possible interaction with the
1000. When the price was obtained from various sources, I calculate a simple average
price. earthquake. I would expect the effect of the import ban to depend on
46
In what I discussed I do not explicitly account for general equilibrium effects of the a community's exposure to imports. To test whether this is the case, I
destruction of transport infrastructure on communities not affected by the earthquake. In
the empirical section I relax this assumption by using the continuous Mercalli measure of
intensity and by varying the sample to account for spillover effects. (footnote continued)
47
I do this because the farm business questionnaire only asks the value of total different clusters (Dercon, 1995; Varela et al., 2012). However, I am not aware that
production by the household from the farm business, and does not distinguish between district- or community-level rice price data for Indonesia exist; I was told by BPS that
different crops. It is therefore an upper bound of the included household's value of rice such data do not exist. For the case of rice, my data construction method based on
production. community price surveys has the advantage that I can hold the quality of rice constant by
48
Another method to investigate how the earthquake shock has impacted integration looking at the price average-quality rice. Conflating product quality and price effects is a
and trade would be to look at the co-integrating relationship between the price series of common problem when analyzing aggregate price series (Varela et al., 2012).

54
M. Kirchberger Journal of Development Economics 125 (2017) 40–58

compute the distance of the communities with cities and ports, and Table 8
interact it with the earthquake measure.49 Ideally, I would like to again Dependent variable: changes in log of rice price.
instrument the destruction measure with the modified Mercalli mea-
Destruction Baseline Distance to Distance to
sure. However, few clusters were affected by the earthquake (23 out of imports city ports
141 clusters), such that the first stage is very weak (showing a F-
statistic of around 3). It is not apparent in what direction the (1) (2) (3) (4)
destruction measure would bias the estimated coefficients: poorer
Houses destroyed
agricultural communities with lower-quality housing might have Destruction 1.039*** 0.787*** −1.411 −19.943***
suffered relatively more destruction, but whether these communities (0.284) (0.278) (1.060) (5.791)
would have had higher or lower price growth is unclear.50 I therefore Destruction * % of 1.059***
show the results for both the destruction measure and the modified rice imported
(0.183)
Mercalli measure.
Destruction * 0.227**
distance to city
5.3.2. Downward shift in labor supply (0.091)
The second channel through which agricultural wages could have Destruction * 0.206***
distance to port
increased is through a downward shift in labor supply in the agricul-
(0.055)
tural sector, possibly due to job opportunities opening up in other Obs. 141 140a 141 141
sectors of the economy associated with reconstruction. To test this R2 0.027 0.077 0.056 0.051
channel, I use the Indonesian Sub-National Growth and Governance
dataset, which contains sectoral employment shares at the district-level Mercalli intensity measure
Mercalli 0.014 0.011 −0.013 −0.096
for the years 2001–2004 and 2007. The labor market data contained in
(0.011) (0.008) (0.01) (0.061)
the dataset are computed from the National Socioeconomic Survey Mercalli * % of rice −0.0008
(SUSENAS) data, a large yearly national socio-economic survey, which imported
is representative at the district level. The individual questionnaire in (0.012)
Mercalli * distance to 0.003***
the SUSENAS survey asks the employment sector of household
city
members aged 10 and over. The employment share per sector is (0.0007)
defined as the number of individuals in each district employed in a Mercalli * distance to 0.001*
particular sector, divided by the total working population in each port
district. I also include the fraction of unemployed individuals, which is (0.0006)
Obs. 141 140 141 141
computed on the basis of employed individuals aged 15 and over,
R2 0.134 0.161 0.188 0.158
divided by the total labor force (defined as individuals working,
temporarily absent from work but having a job, and those who did Notes: All models control for the month in which the first household was interviewed in a
not work but were looking for a job or preparing for a job). As the labor community in both survey rounds and the suitability of land for rice production. Column
market data for 2005 are missing and I do not have information on the (2) also controls for the amount of rice a community imported, Column (3) for the
distance to the nearest city, and Column (4) for the distance to the nearest port; robust
exact timing of the survey in 2006, I compare changes in sectoral
standard errors in parentheses, clustered at the district level.
employment shares between 2004 and 2007 in earthquake-affected and *
Significance at 10% level.
comparison districts. To estimate the impact of the earthquake on the **
Significance at 5% level.
***
share of individuals employed in each sector I use the following Significance at 1% level.
a
specification: I lose one community in this regression, as there were only four households in that
community in 2000, and none of them reported having consumed rice in the past month;
Δpropd 2 = λ 0 + λ1 Hd + εd 2 (4) therefore, I am not able to compute the amount of rice that was imported.

for district d = 1, …, N , where

prop is the proportion of individuals employed in a particular s- 5.3.3. Evidence of mechanisms

ector and the proportion of individuals unemployed,
H is a measure of destruction from the earthquake, and
εd2 is an error term.
The dependent variable, Δpropd2 , refers to changes in the proportion of
individuals employed in a particular sector between 2004 and 2007. To
address the correlation of the residuals of the sectoral share equations,
I estimate the model as a system of seemingly unrelated equations.
Similar to the community-level regression, using the modified Mercalli
intensity as an instrument is not feasible for the district-level regres-
sion: only 14 out of 110 districts were affected, resulting in a weak first
stage. As before, my approach is to show the results using the
destruction measure as well as the exogenous modified Mercalli
intensity measure. I test these two channels in turn.
49
Appendix C discusses the data sources in more detail.
50
I have examined pre-treatment trends by looking at changes in rice prices from
1997 to 2000 and find very similar mean and median price growth for communities for
which farming was one of the three main sources of employment, and those that later
experienced the earthquake.
Table 8 shows the effect of the earthquake on the change in rice
prices at the community level. According to the destruction measure,
rice prices grew faster in communities affected by the earthquake. A 1%
increase in the proportion of houses destroyed led to a 1% higher
growth rate in the price of rice. This effect is significantly stronger for
communities importing a higher proportion of their rice. I also find
evidence that prices grew faster for earthquake-affected communities
that are further away from cities. When looking at the distance to ports,
the earthquake variable turns negative and significant. The point
estimates imply that rice prices grew significantly more for commu-
nities that were at least 97 km away from a port. About half of the
earthquake-affected communities fall into this category. The results are
similar using the destruction measure and the modified Mercalli
intensity, although when I use the modified Mercalli measure I cannot
precisely estimate the heterogeneity with regard to the fraction of the
rice consumed that a community is importing. One explanation is that
the data are very noisy due to the various aggregations that were
required. When I use the Mercalli intensity measure, the point
estimates in Column (3) suggest that the earthquake led to higher
price growth in communities that were further away from a city.51

55
M. Kirchberger Journal of Development Economics 125 (2017) 40–58

Table 9 individuals who worked in agriculture in 2000 left the sector because
Dependent variable: sectoral shares. of the earthquake. This would be consistent with falling agricultural
shares, but it does not imply that agricultural wages grew faster. I
District-level Modified Mercalli
destruction intensity define an indicator that is equal to 1 if an individual is working in the
same sector in 2007 as s/he did in 2000 (and 0 otherwise) to test
(1) (2) whether those who were in agriculture in 2000 are switching out more
relative to the control group. Table C.7 shows that workers in
Δ% Agriculture −0.571 ***
−0.011*
(0.125) (0.0061) agriculture were not more likely to shift out of agriculture in earth-
quake-affected areas. The same is true for workers in the other
Δ % Construction 1.113*** 0.011** sectors.53
(0.177) (0.0046)

Δ % Manufacturing 0.089 0.0133*

(0.390) (0.007)
Δ % Commercial services −0.523** −0.0113*
(0.248) (0.0067)
Δ % Social services −0.094 −0.0018
(0.097) (0.0029)
Δ % Unemployment 0.1796 0.0008
(0.115) (0.0030)
Obs. 110 110
Notes: Coefficients from a system of six seemingly unrelated regressions, indicating the
effect of the earthquake on the change in the proportion of individuals employed in a
particular sector/unemployed; robust standard errors in parentheses.
*
Significance at 10% level.
**
Significance at 5% level.
***
Significance at 1% level.
Table 9 presents the results from the district-level sectoral shares
equation, in which each row shows the effect of the earthquake shock
on the change in the proportion of individuals employed in a particular
sector. Column (1) shows the results using the destruction measure,
and Column (2) shows the results using the modified Mercalli measure.
The growth in the district-level share of the population employed in the
agricultural sector decreased significantly, implying that a 1% increase
in the proportion of houses destroyed led to a 0.57% lower growth in
the percentage of individuals employed in agriculture. There is also a
strong and significant effect on the construction sector, suggesting
some reallocation of workers from the agricultural to the construction
sector. For example, a 1% higher proportion of houses destroyed
during an earthquake led to a 1.1% higher growth rate in the
proportion of individuals employed in construction. The results are
similar when I use the modified Mercalli intensity. Both measures of
the earthquake suggest that there is a contraction of workers employed
in the commercial services sector.52 Again, I do not find significant
effects on unemployment.
Overall, these results suggest that there is some evidence of faster
rice price growth in communities that depend more heavily on imports,
and clear evidence of faster price growth in the most isolated commu-
nities. The main mechanism for the increase in wages in the agricul-
tural sector in the aftermath of the earthquake appears to be the shift of
workers out of the agricultural sector, thereby raising the marginal
product of labor of agricultural workers.
Another explanation of the finding that wage growth is higher for
workers who were employed in the agricultural sector before the
earthquake – besides rising wages in agriculture – is that the
(footnote continued)
51
I have also tried the triple interaction term between destruction, imports, and distance
to the city, while controlling for the cross terms. The coefficients on both interaction
terms are positive; however, at this point cell sizes become very small, so that I can no
longer precisely estimate the coefficient of the triple interaction term.
52
I have also estimated the model with a difference-in-differences specification,
drawing on the earlier years to account for pre-treatment trends; the results are very
similar.
6. Conclusion
This paper explored how natural disasters affect labor markets –
more specifically, wage growth across employment categories and
sectors as well as changes in the sectoral composition of the labor
force. My identification strategy relied on the exogenous nature of a
large earthquake hitting Yogyakarta, Indonesia, on 27 May 2006. I
used a panel of individuals from the IFLS living in the vicinity of the
earthquake and in control cities. I linked these panel data with data on
district-level housing destruction; the modified Mercalli intensity scale
of the earthquake, which takes into account peak ground velocity, peak
ground acceleration, and the topology of the region; data on commu-
nity-level rice prices; and district-level employment indicators.
I found that labor markets are remarkably resilient to such a large
shock; on average, wage growth was not significantly different for
workers who resided in earthquake-affected regions. I found some
evidence that individuals employed as private workers had somewhat
higher wage growth, but the earthquake did not seem to affect workers
who were self-employed, firm owners, or government workers. Given
that these employment categories have different levels of job protection
and regulations, this result is rather surprising.
However, I did find substantial heterogeneity with respect to the
sectoral evolution of wages. Individuals who worked in the agricultural
sector in areas that were strongly affected by the earthquake enjoyed a
substantially higher growth in earnings compared to those in control
areas. The earthquake also did not affect the wage growth of workers
employed in other sectors before the earthquake (construction, man-
ufacturing, commercial services, and social services). This suggests that
local labor markets are fairly segmented, and that mobility is limited.
This is likely to be the case in the agricultural sector, since land as a
factor of production is immobile, many farms are family owned, and it
is relatively difficult to monitor labor in this sector. The result is robust
to a range of specifications that rely on alternative identifying
assumptions compared to my preferred specification, including a
fixed-effects specification. A range of alternative measures of welfare
(income and expenditures) and accounting for spillover effects produce
consistent results. The positive wage growth effects for agricultural
workers are not limited to a particular gender or education level. I find
some evidence that workers previously employed in agriculture, social
services and those who were self-employed, are more likely to remain
employed, and that construction sector workers reduce their work
hours after the earthquake. Before the earthquake they worked, on
average, 14 h more per week than agricultural workers and 6 h more
per week than individuals employed in manufacturing, suggesting a
convergence of work hours after the earthquake.
I discussed two possible mechanisms for this result. First, the
destruction of infrastructure led to increases in the price of food,
particularly in areas that are net importers of food. Second, an increase
in the demand for labor in sectors producing non-tradables in the
aftermath of the disaster drew workers out of the (low-wage) agricul-
53
I also split the sample into those who shifted out of agriculture and those who
stayed to further investigate whether the group switching into a different sector might be
driving these results. I find that individuals who worked in agriculture in both periods are
the ones experiencing the highest wage growth.

56
M. Kirchberger
tural sector into higher-wage non-tradable sectors, leading to a rise in
the marginal product of labor and wages in the agricultural sector. I
find evidence mainly for the second mechanism. Employment con-
tracted in the agricultural sector and expanded in the construction
sector after the earthquake, resulting in higher wage growth for
agricultural workers.
Though this paper focused on a natural disaster in Indonesia, its
findings are relevant for other lower-middle-income countries as well:
they suggest that efficient government responses to large-scale shocks
can lead to positive effects on the evolution of wages. As the response to
the Yogyakarta earthquake has been regarded as fast and efficient, this
finding resonates with Kahn (2005), who finds that institutional quality
can mitigate the adverse effects of natural disasters. Further research
could explore how local labor markets respond to large-scale shocks in
different contexts. For example, what types of labor market institutions
are helpful for protecting wages, and which institutions limit the
flexibility of labor? A second area for future research is to examine
how policy responses differ across contexts by separately identifying
the effects of the destruction vs. the reconstruction shock. Third, in this
study I focused on the short- to intermediate-term effects. Longer post-
disaster time-series data on earnings would allow the investigation of
longer wage dynamics to test whether the effects I find are transitory or
persistent. Given that the frequency of natural disasters is expected to
rise, and the consequences to be greater due to rapid urbanization,
these will become increasingly important questions.
Acknowledgments
I am indebted to Stefan Dercon and Doug Gollin for their support,
generous time, and many helpful discussions. I would like to thank two
anonymous referees and the editor for very helpful comments and
suggestions. I am grateful to Alexei Abrahams, Orazio Attanasio, Silja
Baller, Roman Birke, Steve Bond, Matt Collin, Jonathan Colmer, Banu
Demir Pakel, Dave Donaldson, Shauna Downs, Eric Edmonds, Marcel
Fafchamps, James Fenske, Christian Helmers, Radha Iyengar, Guy
Michaels, Gaia Narciso, Carol Newman, Manasa Patnam, Simon
Quinn, Ferdinand Rauch, Chris Small, Måns Söderbom, Francis Teal,
Gerhard Toews, Tony Venables, Eric Verhoogen, and participants at
many seminars for helpful comments and discussions. I would
especially like to thank John Strauss for granting me access to the
GPS data of the IFLS survey; Kathleen Beegle and Roald Euller for help
with data-related questions; and David Rogers, David Benz, and Luigi
Sedda for their help with GIS-related questions and data. Finally, I am
extremely grateful to Dr. Sutopo Purwo Nugroho from the Indonesia
Disaster Management Board and Mrs. Bana Bodry from Indonesia
Statistics for providing me access to various datasets and GIS maps. I
acknowledge funding from the AXA Research Fund. Most of this work
was done while I was at the University of Oxford and at Columbia
University, and I greatly appreciate the support from those institutions.
All potential errors are my own. An earlier version of this paper,
circulated under the same name, investigated the effects of earthquakes
using the entire sample of earthquakes in Indonesia. This version
replaces earlier versions.
Appendix A. Supplementary data
Supplementary data associated with this article can be found in the
online version at http://dx.doi.org/10.1016/j.jdeveco.2016.11.002.
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