Wesley Miller

​​​Editor’s note: This post is part of a new series about the impacts natural disasters have on a region’s public health, economic activity, and individual decision-making. While the papers cited in the posts extend beyond natural disasters in Texas, the results will be contextualized to the state’s population. For more about this series, click here.

The first paper highlighted in this blog series was published by Deryugina et al. in the American Economic Journal: Applied Economics in 2018. It measures the social and economic costs of Hurricane Katrina on the residents of New Orleans. The cornerstone of this study is the authors’ access to federal tax returns filed between 1999 and 2013. These data allow the multi-year comparison of pre-storm New Orleanians to similar individuals from ten U.S. cities (e.g., Detroit and Jackson, Miss.). Due to challenges in identifying long-run impacts of economic shocks, I’m going to focus on estimates of how New Orleanians fared one to two years after the storm.

New Orleans was experiencing population decline when Hurricane Katrina landed in August 2005, making it difficult to disentangle the portion of population loss caused by the devastation. Deryugina et al. estimate Katrina increased the likelihood of leaving New Orleans within eight months by at least 29 percentage points (on top of the roughly 15 percent of adults who left the city each year) (Figure 1). A large share of the displaced population settled in the Houston region.
Figure 1. Probability of an Intercity Move

Source: Deryugina et al. in the American Economic Journal: Applied Economics (2018)
Note: Figures reproduced using coefficient estimates and standard errors provided in the appendix.

In addition to population disbursement, natural disasters are disruptive to labor markets as recovery efforts require time that could be otherwise spent working. The results corroborate this theory with an estimated $2,000 decrease in income caused by Katrina that persisted for more than a year. These effects were especially prevalent for those living in the most damaged neighborhoods as well as those who left New Orleans permanently. Relocation activities, such as searching for a home in a new town, require additional time and energy that may weigh on labor market participation. As expected, the negative income shock coincided with spikes in unemployment.

A combination of government and non-governmental agencies contributed to recovery and relief efforts in the aftermath of Hurricane Katrina. The federal government spent approximately $120 billion through a multitude of channels, one being changes to the tax code. One such measure availed victims to tax-favored early distributions and loans from retirement accounts (i.e., penalties from certain early withdrawals were reduced) (Figure 2). Deryugina et al. estimate Hurricane Katrina elevated the propensity of early drawing from retirement, leading to an average increase of $458 of income withdrawn through 20 months after the storm. This source of income supplemented lost wages and earnings, enabling some households to smooth the effects of the negative shock over time.
Figure 2. Early Retirement Withdrawals Following Hurricane Katrina
Source: Deryugina et al. in the American Economic Journal: Applied Economics (2018)
Note: Figures reproduced using coefficient estimates and standard errors provided in the appendix​.

Despite labor market challenges and financial distress, Deryugina et al. detect no clear impact on marital decisions. In particular, they find little change in the marital status of New Orleanians compared with the control group. The lack of net effect, however, could mask changes in divorces and new marriages (which could offset each other if affected in a similar magnitude). Results suggest an increase in divorces caused by Katrina, but the estimates are noisy.

This study illustrates the economic challenges facing households after a natural disaster. Preparation and mitigation measures, evacuation, and the subsequent recovery all require resources that are necessarily substituted away from other activities. Evidence indicates that it takes years for conditions to normalize after major shocks, and we are still learning how to smooth that recovery for affected populations.