methods used in the past. Section II introduces macroeconomic and microeconomic input data used in the analysis. Section III assesses the goodness of fit of three model variations to actual distributions and the effects on poverty, inequality, and growth incidence curves. Section IV presents the final remarks.

# **I. Methodological approach**

The estimates and analysis presented in this paper use an improved micro-simulation model to predict the welfare and distributional impacts of growth. The micro-simulation model superimposes macroeconomic projections on behavioral models built on the last available household survey for each Latin American and Caribbean country. The model is loosely based on previous approaches to microsimulation described in Bourguignon et al. (2008) and Ferreira et al. (2008). The main difference here is the omission of the computable general equilibrium (CGE) component, which is challenging to employ in most developing countries.<sup>4</sup> Instead of a CGE, the approach described in this paper links the behavioral microsimulation model to aggregate macroeconomic data for LAC countries. However, since employment and labor income estimations are usually not available, the output growth estimates must be translated into employment and labor income changes at the sector level. These estimates are typically made using sectoral output-employment and productivity-labor income elasticities based on aggregate output and labor market past data, which are then applied to the output growth projections to generate changes in employment and labor income by sector (Braga, C. et al., 2023).<sup>5</sup> The predicted sectoral employment and income, along with the macroeconomic output projections, are the final inputs for the microsimulation model. This approach has been extended to explicitly consider informality within economic sectors, which comprises a major problem in the LAC region.

This micro-simulation model accounts for multiple transmission mechanisms that affect family labor and non-labor income and captures impacts at the micro level across the income distribution. In particular, the model can consider significant changes in population over time; labor market adjustments in employment and earnings, or a combination of both; and changes in non-labor incomes, including international remittances, capital, pensions, and public transfers.

## **The micro-simulation model setup**<sup>**6**</sup>

The micro-simulation is divided into three steps: the baseline, the simulation, and the assessment. It is based on Olivieri et al. (2014) and Olivieri, S. (2020), albeit with a major difference in accounting for labor market informality when projecting labor income.

> 4 For further details on implementing an integrated approach, reach out to the CGE-GIDD – MTI team.

> 5This approach was conceptualized, refined, and tested in a diverse mix of countries during the financial crisis (such as Bangladesh, the Philippines, Mexico, Poland, and Mongolia) as well as after the crisis (such as Costa Rica, Panama, Uruguay, Serbia, Armenia, Belarus, Kyrgyz Republic, Moldova, Poland, Romania, and Ukraine). More recently, it was adjusted for the last twin crises in Iraq.

> 6 This section is based on Olivieri, S. et al. (2014).

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