Drought in the city: The economic impact of water scarcity in Latin American metropolitan areas

While the harmful impact of droughts is well-documented in rural areas, how droughts affect cities’ economies remains an open question. Using monthly labour force surveys from 78 cities in Latin America, we demonstrate that large sustained dry events decrease the probability of being employed, hourly wages, hours worked, and labour incomes. Informal workers are impacted the most. We highlight that the impact of droughts is larger than the impact of wet events, like those that cause floods. Health and power outages are two pathways explaining our results. Climate change will increase the occurrence of droughts, making our findings particularly relevant.