Labor Income Effects of External Shock in EmergingMarkets: Factors Explaining the Decline During theCOVID-19 Pandemic in Ecuador

This study examines labour earnings dynamics across Ecuador’s income distribution during the COVID-19pandemic and the 2021 recovery, using recentered influence function regressions. Ecuador’s high levels ofinformal employment, self-employment, and exposure to pandemic-related shocks make it a particularly in-formative case for Latin America and other economies characterised by widespread labour informality. Theanalysis applies Oaxaca–Blinder decompositions at the mean and across quantiles to disentangle the con-tributions associated with worker characteristics, or endowment effects, from those of wage premiums, orwage structure effects. The results show that earnings losses were most severe among lower-income groupsand were driven primarily by changes in factor prices rather than by shifts in employment composition. Thesubsequent U-shaped recovery reflects the combined influence of price and composition effects. Informalself-employment played a central role in these dynamics, as mobility restrictions disrupted its usual counter-cyclical adjustment mechanism and altered the wage premiums associated with this form of work. Overall,the findings highlight the importance of self-employment wage premiums in explaining post-pandemic earn-ings trajectories.