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Abstract
Despite the liberalization program that Ethiopia embarked upon since 1992
aggregate indicators of poverty and inequality largely remained unchanged. This
paper addresses why incomes and inequality largely remained stable at a time of
fundamental changes in macroeconomic policy environment. We have used both
data exploratory analysis as well as earning and occupational choice modelling,
together with counterfactual simulation, to investigate this issue. The study showed
that the absence of change in aggregate measure of poverty and inequality hides an
enormous change that occurred across different income categories. This shows the
importance of understanding the labour market to understand the policy propagation
mechanism through which macro policy is expected to affect poverty. The study has
show that although there seem to be limited change in poverty and inequality at
aggregate level, there is significant change within and across categories of
households. Thus different household are affected differently by the reform. The
level and distribution of household incomes is found to depend on the structure of
returns to labour and on the occupational choice the households made. Thus, policy
effectiveness of poverty reduction policies could be achieved if we understand the
workings of the labour market and how it affects both level and distribution of
income across different categories of income & sector.