labor participation model relies on the utility maximization approach develops by McFadden<sup>9</sup> . Assume that the utility ( _U hiLj_ ), for individual _i_ of household _h_ , associated with labor status _j=0,...,J_ , and level of education _L_ , can be expressed as a linear function of observed individual and household characteristics ( _Z hiL_ ) and unobserved utility determinants of the occupational status (<sup>_v_</sup> _iLj_<sup>). Furthermore, individual</sup><sup>_i_chooses sector</sup><sup>_j_</sup> (the indicator function _I hiLj_ = 1) if economic sector _j_ provides the highest level of utility<sup>10</sup> : In the Serbian case, each individual has to choose from five alternatives: being inactive, unemployed or being employed in an economic sector (i.e; agriculture, industry and services). The criterion value associated with being inactive is arbitrarily set to zero. The unobserved utility determinants of each occupation status are assumed to be identically and independently distributed across individuals, occupations and skill-levels.

The observed heterogeneity in earnings in each economic sector _j_ can be modeled by a log-linear function of observed individual and household characteristics ( _X hiL_ ) and unobserved factors ( μ _hiLj_ ) as a standard Mincer equation<sup>11</sup> . These earning functions are defined independently on each economic sector by skill level ( _L_ ): The second component of the total household income, total family _non-labor_ income, is the sum of different elements at the household level such as international (<sup>_r_</sup> _hI_<sup>) and domestic remittances (</sup><sup>_r_</sup> _hD_<sup>), capital, interest and</sup> dividends ( _k h_ ), social transfers ( _trh_ ) and other non-labor incomes (<sup>_z_</sup> _h_<sup>). Formally,</sup> We focus mainly on international remittances and make some minimal assumptions about other components. Ideally, we would model international remittances but migration-related information in most surveys is poor or insufficient.

Equations (1) to (4) complete the model. Total household income is a nonlinear function of the observed characteristics of the household and its members, and unobserved characteristics of household members. This function depends on a set of parameters: those of the occupational choice model for each skill level and the parameters in the earning functions for each economic sector and skill level.

The second step consists of _replicating_ the macro-level changes in output and employment (actual or projected) between baseline and 2011 on the household data of the baseline year 2010. This process uses predictions of behavioral models estimated on the baseline household data (as in step 1 above), and generates household and individual-level predictions for employment, earnings and remittances for 2011. Since an individual’s labor income depends on his/her employment status and labor earnings, how the output change in a particular sector is apportioned between employment change, earnings change and adjustments across sectors depends on how responsive (elastic) employment in that sector is to output change. It also implies that at the household level, the extent of the impact depends on the size of the aggregate change at the sector level and the demographics and characteristics of household members, which influence the labor force status and earnings of household members after the change.

> 9 McFadden (1974)

> 10Bourguignon & Ferreira (2005) say that this interpretation is not fully justified because occupational choices may actually be constrained by the demand side of the market, as in the case of selective rationing, rather than individual preferences. 11 Mincer (1974)

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