Household Responses to Adverse Income Shocks in Latin America

This paper uses a new data set to study household responses to adverse income shocks in seven Latin American countries. The results show (i) that households respond to income shocks mainly by increasing their labor force participation, selling assets, and disinvesting in human capital, (ii) that poor households are most likely to be affected by adverse income shocks, and (iii) that lower-middle class households are more likely to cut back human capital investments and migrate abroad in the face of an adverse income shock. Taken together, these results offer ample justification to publicly funded safety nets targeted to the poor.