- Step 3 – Flows into growing sectors: Individuals in the pool of “eligible” workers will be assigned to growing sectors on the basis of their predicted probability of being employed in each sector. Assignments are made sequentially with the sector whose employment share is growing fastest absorbing workers first and the sector whose employment share is growing the slowest absorbing workers last. Reassignments to each sector will continue up to the point where the change in the sector employment share at the micro level matches the change at the macro level.

There are a few important features of this process that are worth mentioning. The reassignments described in steps 1 to 3 are calibrated so as to replicate **net** aggregate flows between employment and non‐employment and across sectors. In reality, movements across these different states are quite significant so that gross flows are usually larger than net flows. The order of proposed steps is such that it allows for non‐employed individuals to become employed and employed individuals to become non‐ employed, but also for individuals to change sectors. In doing this we try to capture the fact that highly “employable” individuals are more likely to remain employed in one sector or another, at times at the expense of less “employable” workers (i.e. highly “employable” workers will crowd others out when employment opportunities become relatively more scarce).

We next use the earnings model estimated as part of the calibration to predict earnings for two groups of workers: those with no previous earning history (i.e. non‐employed in 2005) and those who change sector of employment. Because earnings are a function of both observable and unobservable individual and job characteristics, we add a random element to the predicted earnings produced by the model to account for unobserved heterogeneity.<sup>11</sup> For all other individuals, we use the earnings information available in the household survey.

Once all workers have been assigned positive labor earnings, total earnings in a sector are adjusted to match aggregate projected changes in output. This step relies on the fact that that projected changes in sectoral output can be explained by projected changes in sectoral employment and projected changes in sectoral earnings and profits, and _assumes_ that earnings and profits grow at the same rate.

The treatment of public sector workers and those with more than one job differs slightly from what we just described. Total public sector employment is assumed to remain constant (i.e. no individuals are assigned to or out of the public sector) and labor earnings of public sector workers are adjusted in line with their sectoral mapping (agriculture, industry or services). Similarly for those holding more than one job, we assume the sector of employment of their secondary activity remains constant while earnings are adjusted in line with sectoral changes.

The third step in the simulation process pertains to changes in international remittances. As mentioned above, in the case of Bangladesh we simulate these changes following a very simple allocation rule. We calculate the total change in international remittances between 2005 and 2009‐2010,<sup>12</sup> using actual and

> 11 Specifically, we draw an individual error from the error distribution generated during the estimation.

> 12 The nominal (in dollar terms) growth in external remittances is adjusted using the taka/$ exchange rates of the relevant years, to arrive at the value of change in remittances in constant 2005 takas.

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