This document summarizes a study on urban wage behavior and food price inflation in Ethiopia from 2001-2012. The study finds: 1) Real wages of daily laborers declined 10-26% during periods of rapid food price inflation in 2008 and 2011, significantly reducing the disposable income of the urban poor. 2) Wages adjusted only minimally to food price changes in the short-run, though a long-run adjustment relationship was found between wages and food prices. 3) The impacts of food price inflation appear to have been worse for urban workers in the 2011-2012 period compared to 2008. The study concludes that Ethiopia may need to consider an urban social safety net program, such as cash transfers

1. ETHIOPIAN DEVELOPMENT
RESEARCH INSTITUTE
URBAN WAGE BEHAVIOR
AND FOOD PRICE INFLATION IN
ETHIOPIA
Derek Headey, Fantu Bachewe, Ibrahim Worku,
Mekdim Dereje & Alemayehu Seyoum Taffesse
IFPRI ESSP-II
“Towards what works in rural development in Ethiopia: Evidence
on the impact of investments and policies”
A conference by IFPRI-ESSP II
13 December 2013
Addis Ababa
1

2. Outline
1) Background
2) Data and Methods
3) Results
4) Conclusion
2

3. 1) Background
• Global food crises of 2007/08 and 2010/11 sparked efforts to
understand the poverty impacts of high real food prices
o World Bank simulation suggested global poverty rose by
160 million people
o Subjective survey data from Gallup suggest substantial
variation of impacts: (Headey 2011)
o A third approach is to deflate wages by (food) prices to
proxy for disposable income
o Cointegration analyses: short and long-run adjustment of
wages for changes in food prices-
3

4. 1) Background
In this paper we have two objectives:
1. To track real wages (as per Mason et al.)
2. To formally test wage adjustment (as per Lasco et al., etc)
Particularly interesting in the Ethiopian context :
1. Large population of urban poor
 60% earns <$2/day and 20% unemployment rate
2. Understudied in World Bank & Gallup studies
3. Rich monthly panel data on informal or casual wages
4. Arguably one of rapid food inflation in 2008 & 2011
4

5. 2) Data and methods
• CSA consumer price data covering
 119 woredas, with 1 or more markets-from 3 respondents
 The July 2001 to August 2012
• Prices on food & non-food items (more than 700 items): wages of
daily laborers, and maids and guards salaries,…
 Maids and guards are partly paid with food-in-kind
• Food, non-food, and general price indices specific to the poor
computed to create a better wage-welfare proxy,
• The 2004/05 HICES expenditure data used to measure
expenditure shares of food & non-food for the bottom 40%
5

6. 2) Data and methods (cont.)
• Rural and urban areas of each region considered separately
• Weights applied on CSA price data to derive spatially
disaggregated “poor person’s price indices” (PPPIs) for food,
non-food and all items
• Laborer’s wages deflated by both food and total CPIs for the poor.
 Deflating by total CPI appropriate for welfare interpretation,
 Deflating by food prices more relevant for the poor
• Deaton & Dreze (2002)-casual labor wage series are a good
poverty indicator-represent reservation wage of the poor
• We make the same argument for Ethiopia
6

7. 2) Data and methods (cont.)
• Finally, we use panel regressors to see whether wages react to
food prices in the short run
• We use a panel vector error correction (PVEC) model & spatially
disaggregated subsamples by town/city size & regions
• PVEC effectively separates out a long run adjustment relationship
(cointegrating relationships) and short run adjustments.
• Short run adjustments more interesting as they are more welfarerelevant.
7

8. 2) Data and methods (cont.)
• The theoretical model results in a relationship:
W  (P , P , P , Q
f
n
c
Mc
)
where W, Pf, Pn, and Pc stand for wages, food, non-food, and
construction materials prices and QMC construction output.
• Given all series are non-stationary we can’t use OLS
• Cointegration analysis used
Zit  1Zit 1  2 Zit 2    k 1Zit ( k 1)  Zit 1    X it   t  it
where Z  [ w p f p n p c q M c ],    A ,
k
k
it
it
it
it
it
it
1   Ak  Ak 1  ...  A2 ,
and
 k 1   Ak  Ak 1 ,
  ( I  A1  ...  Ak ).
8

9. 2) Data and methods (cont.)
Table 1. Regional average daily laborers’ nominal wages
and expenditure shares for the lowest 40% income quintile
Region
National
Wages in USD
Tigray
Amhara
Oromiya
Somali
SNNP
Addis Ababa
Average nominal wages
Urban
Rural
2001 2005
2010
2012 Food Non-food Food Non-food
6.9
8.1
23.4
34.3
67%
33%
69%
31%
0.82
9.0
6.0
7.3
10.7
5.7
6.7
0.93
10.0
7.6
8.2
10.7
6.6
9.1
1.62
28.2
23.7
21.2
30.7
20.3
25.6
1.95
45.8
32.1
31.9
47.8
28.7
35.2
65%
63%
67%
68%
65%
63%
35%
37%
33%
32%
35%
37%
72%
66%
71%
70%
67%
_
28%
34%
29%
30%
33%
_
9

10. Fig. 1. Price trends for the urban poor: 2001-2012
2 sharp food price spikes, but
400
350
300
250
Nominal wage index
2011 saw nonfood inflation too
Poor persons' food CPI
Poor persons' nonfood CPI
Poor persons' total CPI
200
150
100
50
0
2001m7
2002m1
2002m7
2003m1
2003m7
2004m1
2004m7
2005m1
2005m7
2006m1
2006m7
2007m1
2007m7
2008m1
2008m7
2009m1
2009m7
2010m1
2010m7
2011m1
2011m7
2012m1
2012m7
Price and wage indices (Dec. 2006=100)
450
10

11. Fig. 2. Comparing food price trends for the poor and
general population: 2001-2012
Poor persons' food CPI
350
Food CPI
86% and 73% growth
in PPFCPI & FCPI
300
250
200
150
100
Over 97% increase
50
2001m7
2002m1
2002m7
2003m1
2003m7
2004m1
2004m7
2005m1
2005m7
2006m1
2006m7
2007m1
2007m7
2008m1
2008m7
2009m1
2009m7
2010m1
2010m7
2011m1
2011m7
2012m1
2012m7
Food CPI (Dec. 2006=100%)
400

12. Table 2. National and regional trends in daily laborers' wage
(2006 birr), deflated by the poor person’s food CPI: 2001-2012
Year
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
%: 2007-08
%: 2010-11
National
12.0
11.9
10.8
10.8
10.9
10.7
11.3
9.8
10.8
12.0
10.1
10.5
-13.8%
-15.4%
Tigray Amhara Oromia Somali
15.1
10.0
12.0
14.7
14.8
9.5
11.7
15.5
12.8
8.7
10.6
14.5
12.6
9.3
10.2
13.9
13.1
9.9
10.3
12.5
11.9
10.6
9.8
12.2
12.8
9.8
10.1
14.7
11.6
8.8
7.8
13.4
11.6
9.8
8.8
16.5
13.1
10.6
9.7
17.9
13.1
8.7
8.3
13.7
13.1
8.6
8.2
16.2
-9.4% -10.1% -23.0% -8.4%
0.3% -18.1% -14.4% -23.2%
SNNP
9.4
9.2
8.4
8.3
8.2
8.2
8.5
7.0
7.6
9.3
7.7
7.4
-17.8%
-17.5%
Addis
10.5
10.6
10.0
10.7
11.2
11.4
12.0
10.0
10.5
11.1
9.1
9.2
-17.3%
-17.9%

13. 15
14
22% decline
Wages deflated by poor persons' food CPI
Wages deflated by poor persons' total CPI
13
12
11
10
9
8
16% decline in fooddisposable income relative
to total disposable income
26% decline
7
2001m7
2002m1
2002m7
2003m1
2003m7
2004m1
2004m7
2005m1
2005m7
2006m1
2006m7
2007m1
2007m7
2008m1
2008m7
2009m1
2009m7
2010m1
2010m7
2011m1
2011m7
2012m1
2012m7
Real daily wage of laborers (Dec. 2006 birr)
Figure 3. Trends in real daily laborer wages deflated by the
urban poor’s food and total prices indices

14. 3) Results
• Substantial long-run adjustment of wages to food prices,
but lower to non-food prices:
Wages =1.197*food CPI+0.484*non-food CPI
- 0.564* CMU CPI +0.00003*t+0.424
Adjustment speed: 3.4% per month
• Difficult to put a welfare interpretation
I. It takes long time for wages to partially and fully adjust
o 48 and 86 months for wages to partially and fully adjust
for one SD change in poor persons’ food CPI
o 61 and 101 months for one SD change in non-food CPI
II. Short run adjustments are small

15. Table 3. Short run adjustment coefficients of panel vector
error correction (PVEC), July 2001-October 2011
Variable
Full
sample
∆ FPIt-1
-0.029**
-0.049*
-0.033*
-0.044
0.115
0.021
-0.058*
∆ FPIt-2
-0.029**
-0.044*
-0.034**
-0.037
0.114
-0.023
-0.019
∆ FPIt-3
0.005
-0.012
_
-0.037
_
0.019
0.006
∆ NFPIt-1
-0.027**
-0.011
-0.035**
0.025
-0.042
-0.005
-0.0158
∆ NFPIt-2
0.004
0.012
0.006
0.035
0.0004
0.006
0.02
∆ NFPIt-3
-0.017
-0.021
_
0.002
_
-0.015
0.017
∆ CMRUPIt-1
0.091***
0.011
0.142***
0.139*
-0.13
0.043
0.146*
∆ CMRUPIt-2
0.101***
0.039
0.103***
0.092
0.148
0.07
0.0072
-0.011
0.019
_
-0.081
_
-0.038
-0.098
∆ CMRUIt-3
“Cities”
>=30K
Small
towns
<30K
SNNP
Addis
Ababa
Amhara
Oromia

16. 4. Conclusions
Main findings:
 Casual workers in urban Ethiopia have been hit hard by
rapid food inflation in 2008 & 2011, particularly ultra-poor:

10-26% loss of disposable income
 2011-12 crisis seems worse than 2008 crisis
 Short run results show scarcely any adjustment and “In the long
run we are all dead”
 Given households could have coping mechanisms (e.g. long work
hours), these may be upper bound estimates of welfare impacts
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17. 4. Conclusions (cont.)
Policy questions:
 GOE has focused on trying to directly curb food inflation through
price controls & some subsidization of food.
 Efforts to reduce domestic inflation are sensible,
 The capacity to fully reduce inflation may be limited given higher
international prices and growth scenarios
 Does Ethiopia need an urban social safety net?
 Many considerations here, but one option is to index cash
transfers to poor person’s price index
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18. Thank you!
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