assessment of the evolving trend in poverty.<sup>26</sup> Assessing the level of improvement of welfare in the late 1990s, about 47% of the urban population indicated a consistent deterioration of their living conditions. The figures were lower in rural areas, where only 37% of the population indicated that their living standards have somehow deteriorated. The poor- non poor breakout provides a more consistent outcome at the national and regional level, though the figures remain much lower in rural areas. At the national level, 41% of non poor indicated a deterioration of their living conditions, against about 65% for the poor who provided concordant information on the state of their welfare. The highly negative perception expressed by the urban poor is preserved along geographical boundaries. About 80% of urban poor indicated a further deterioration of their living conditions, against only 53% of rural poor who expressed the same level of non satisfaction.

The regional profile of poverty shows an overall improvement of welfare in the late 1990s. The improvement is consistent across all the regions, including Latgale, the poorest region of Latvia. However, the urban-rural gaps in the growth of household income affected the changing regional profile of poverty. The largest gain in the recovery phase of the transitional period is achieved in the Riga region, where the headcount index fell by about 50%, reflecting the continuous rise in urban household income observed in the 1996-1999 period (Republic of Latvia [2003]). For instance, the monthly per capita income increased by about 40% between 1996 and 1999 in Riga and the latest surge in 2000 is consistent with ongoing patterns.

The significant improvement in welfare in urban areas, and particularly in the Riga region may reflect the fact that the relatively high and sustainable growth rates recorded in the aftermath of successive economic downturns were largely skewed, with an urban bias. The apparent skewness is highlighted by the distribution of unemployment and wages across geographical regions. The average gross wage differs significantly between Riga and other regions, and is over 40% higher than in Latgale, the poorest region of Latvia. Similar gaps in the wages are observed between Riga and most other regions (Republic of Latvia [2001]). Hence, residing in the Riga region comes with a substantially high wage premium. The overall improvement in the Riga region is also illustrated by the relatively low unemployment rate there. While long-term unemployment is over 7% in Latgale, significantly lower rates are recorded in Riga (less than 1%). Similarly, while registered unemployment is over 18% in Latgale, it is less than 5% in Riga.

By contrast, the aggregate per capita income increased by less than 7 percent in rural areas during the same period (1996-1999). This weak income growth in rural areas partly contributed to the slower declining rates of poverty in the other 4 regions of Latvia (see Table 2). Particularly affected is the region of Vidzeme, where the poverty incidence remains constant at about 24% over the two reference periods. Worse, the poverty gap (<sup>_P_</sup> 1<sup>) even</sup> increased, suggesting higher vulnerability. As a result of increased vulnerability, the total amount of resources required to eradicate poverty under perfect targeting and in the absence

> 26 In fact the labor market segmentation goes beyond spatial dimension: though there is a significant wage premium associated with working in urban areas, labor market segmentation also has a gender dimension. Already in the mid1990s, earnings in urban areas were 27% higher for men and 15% higher for women. At the same time, men and women in Latgale, the poorest region, received earnings 27% less than in Kurzeme (World Bank [2000a]). This bias persisted in the late 1990s and up to 2002: Indeed, employees working in a rural area earned 10% less than an otherwise similar employee in a small city in 2002; and similarly, employees working in Riga earned 37% more than those working in smaller towns (OECD [2003]).

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