country than in others. We would expect larger reductions in weather-induced price volatility in areas where improvements in market access have been faster. Data on access to markets in 1994 and 2007 is available from Schmidt and Kedir (2009) allowing a comparison of markets that saw significant improvements in market access prior to 2007 with markets that saw less improvement. We test whether the price impact of shocks is lower in markets with greater improvements in market access.

The demand effect of weather on local grain prices will fall if the sensitivity of household income to weather is reduced. This can occur if households increase the share of their income that comes from non-weather dependent sources. Since 2005, transfers have been made to households in selected districts as part of the PSNP. These transfers increase slightly when weather conditions are bad as there is some provision within the program for benefits to be scaled up when the weather is bad. Some districts have received transfers in kind and some in cash. The in-kind transfers from PSNP affect both the local demand and supply of food, but cash transfers have no supply effect, only a demand effect. We examine whether the impact of weather on local prices is smaller in places where the PSNP has been introduced. We examine whether the presence of cash transfers made as part of the PSNP has been associated with a lower demand effect of weather on prices in markets of the recipient districts, causing the inflationary supply effects to dominate in these markets.

Districts are not selected to receive transfers at random. The PSNP has been targeted to more food-insecure _woredas/_ districts in Ethiopia.<sup>11</sup> Weather shocks may have had a differential impact on prices in these markets even before the PSNP transfers were introduced in 2005. After controlling for these differences, we expect that the introduction of transfers in PSNP districts would keep demand for goods high mitigating any price impact of lower demand in the wake of a shock. This, however, requires that there were no other reasons for the relationship between weather shocks and prices to be changing differently in PSNP districts, and this is not something we can assume. The results of this analysis cannot determine whether it is the introduction of the safety net that has driven any observed changes.

# **Question 4: Do weather shocks impact local wages for unskilled labor?**

In addition, we examine whether the wage data recorded for unskilled workers in the monthly retail market survey indicates weather shocks having an impact on local labor markets. In some contexts, the negative shock to farm incomes that a weather shock results in increased supply and reduced demand for labor, both of which depress wages (Deveraux 2007). Labor supply increases as households seek to make up agricultural income losses and demand for labor falls as households have reduced ability to hire labor. If local labor markets are limited, as in rural Ethiopia where farms and small business rely on family labor, we may expect both effects to be small. Therefore, we anticipate the negative effect on wages to be negligible in rural Ethiopia, contrary

> 11 Administratively, Ethiopia is divided into nine regions/ _kilils_ (Tigray, Afar, Amahara, Oromia, BenishangulGumuz, Gambella, Harari, Somali and Southern Nations, Nationalities, and Peoples’ Region (SNNP)) and two autonomous cities (Addis Abeba and Dire Dawa). These regions and cities are divided into _zones_ or sub-cities, which are further divided into districts ( _woredas_ ).

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