Labor Income Effects of External Shocks in Emerging Markets: Factors Explaining the Decline during the COVID-19 Pandemic in Ecuador

This study uses recentered influence function regressions to analyze changes in labor earnings across Ecuador's income distribution during the COVID-19 pandemic and the 2021 recovery. With high informality and significant pandemic impact, Ecuador offers unique insights for the literature. Applying Oaxaca-Blinder decompositions at the mean and across quantiles, the analysis separates the contributions of worker characteristics (endowment effect) and wage premiums (wage structure effect) to these changes. The results show that income losses were most severe among lower-income groups, driven mainly by changes in factor prices, not employment composition. In 2021, labor income exhibited a U-shaped recovery, influenced by both price and composition effects. Informal self-employment, particularly changes in wage structures, played a key role in explaining income variations. The data highlight that the pandemic’s main impact on labor income was through self-employment wage premiums, demonstrating the complex effects of the crisis on Ecuador’s labor earnings.