the same but earnings are reduced by 60 percent as consequence of “taxation” by the Islamic State and a contraction in economic activity.<sup>19</sup> Private and public transfers from PDS and social protection are eliminated based on lack of connection and communication with the rest of Iraq. However, left behind families are assumed to keep their pensions as well as their services received from dwellings when owners.

In the consumption space, it is reasonable to assume that there is negligible consumption on PDS food items as supplies have been cut off or are erratically available. The response in consumption of these items is very inelastic to changes in prices and people might consume them even in distorted markets (Krishnan, et al (2014)). However, these items are normal goods, which implies that consumption positively reacts to income changes. Given the combined effect of the likely increase in local prices as consequence of distorted markets and the reduction in total household income; the assumption of cutting off the consumption of food rations appears reasonable.

It is relevant to add that some of these adjustments are individual specific and others are household specific. While on the flow of services from durable goods and assets as well as public and private transfer adjustments act at the household level, labor status and labor income adjustments work at the individual level. All these adjustments are implemented in the simulation sequence after total population growth has been factored in. The implication of this sequencing is that all labor and non‐labor adjustments will take into account the implications of population displacement. For instance, the labor market in the Kurdistan region of Iraq will be affected by the addition of the IDP population. Finally, sensitivity analysis has been implemented with some of these assumptions and results were not affected significantly by them.

# **III. Results**

This section presents the results of the first stage or prospective study of the economy based on the micro‐simulation methodology described in Section 1. It is divided into three subsections: the first one shows aggregate results on employment, income, poverty and inequality impacts of the twin crises for total country and its component regions. The second part focuses on the distribution of such impacts across welfare groups. The third part presents results for the internal displaced population.

For this analysis, the 18 governorates of Iraq have been grouped into 6 regions. These are the following: Kurdistan (i.e. Erbil, Dohuk and Sulaimaniya); Baghdad; IS‐affected (i.e. Nineveh, Anbar and Salahadin); Rest of North (i.e Diyala and Kirkuk); Centre (i.e. Babylon, Wasit, Najaf and Karbala); and South (i.e. Basrah, Thi Qar, Qadisiya, Muthanna and Missan).<sup>20</sup>

> 19 Anecdotal evidence of taxation of salaries has been widely cited: <u>http://www.bloomberg.com/news/articles/2015‐06‐ 10/mafia‐like‐islamic‐state‐taxes‐and‐extorts‐like‐a‐drug‐cartel;</u> http://www.nytimes.com/interactive/2015/05/19/world/middleeast/isis‐finances.html?_r=0

> 20 This classification differs from that previously used in the World Bank (2015 a)

15