How do drought shocks affect sectoral rural labor allocation in the context of a least developed country? We analyze this question using five-year panel data from rural Ethiopia. We find that households respond to both short-term and persistent droughts by reallocating labor from agricultural wage jobs to non-farm self-employment. We further show that the negative effects of drought on agricultural productivity and distortive effects in local labor markets primarily drive the observed labor reallocation pattern. Lastly, we find suggestive evidence that labor reallocation to non-farm self-employment is partially welfare enhancing. This evidence broadly suggests that the changing rural employment landscape and unique structural transformation pattern in sub-Saharan Africa (SSA) can partly be attributed to the negative effects of weather shocks.
