Non-agricultural activities appear to have compensated for the loss in agricultural employment in rural areas, but unemployment rates in urban areas with a previously important share of agricultural labor have risen in that period (Dias and Amaral 2002). Between 1997 and 2001, overall urban unemployment has risen from 9.44 to 10.6 percent, an increase that may be related to the decline in agricultural employment.<sup>6</sup> Less agricultural employment opportunities may also be one of the reasons for further urbanization in Brazil although it is difficult to establish this link empirically, as we explain in more detail later. The rural population declined quite dramatically from 24 percent in 1991 to 22 percent in 1996 (IBGE 1997) and 16 percent in 2001 (PNAD 2001). The trends in rural poverty mentioned above suggest that the described developments have improved rural livelihoods. Nevertheless, poverty rates in rural areas remain well above urban poverty rates.

Future developments in agriculture are not known with certainty, but it is likely that some of the observed trends, in particular the decline in agricultural employment and the related, though very small, increase in incomes from agriculture, will continue. These future developments form thus the basis for our Business as Usual (BaU) scenario which provides an initial ex-ante quantitative analysis of the forthcoming changes in poverty and income distribution.

So far, we have been mainly concerned with the rural poor and the developments in the agricultural sector. However, more than two thirds of the Brazilian poor either live in urban areas or from income earned in non-agricultural sectors. Our analysis explicitly considers how wages and employment in the non-farm sectors, the main income sources for the urban poor, are affected by the migration flow out of agriculture and by the education upgrading, but other factors are admittedly excluded. In particular, Ferreira and Paes de Barros (2005) find the increase in extreme poverty in urban Brazil to be related to rising unemployment and informality. Elbers, Lanjouw, Lanjouw and Leite (2004) report that the poverty incidence among informal sector employees and the urban self-employed is almost as high as among rural self-employed. In addition, educational expansion has been identified as a major tool in the fight against urban poverty and, for good reasons, it has become a major policy focus of the Brazilian government.<sup>7</sup>

> 6 Data from employment histories in the PNAD reveal that in both 1997 and 2001 about 6 percent of those who became unemployed in the last year were employed in agricultural sectors before. Taking into account that approx. 20 percent of the workforce are employed in agriculture, this figure is rather low and may be taken as a sign that the rise in urban unemployment is not causally linked to the decline in agricultural employment.

> 7 The Bolsa Escola Program, a means-tested conditional cash transfer program that reaches 6 million households in Brazil, is one of the major policy instruments in this regard. See Bourguignon, Ferreira and Leite (2002) for an assessment of Bolsa Escola using a microsimulation model.

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