We estimate one set of elasticities for 2014 using information on sectoral GDP and employment changes between 2007 and 2012 ( Table 2 ). Over the last 5 years, these parameters show a weak or inelastic response of employment to changes in output. For instance, manufacturing and construction grew at a high annual growth rate of 13 percent between 2007 and 2012, however, employment grew by only 4 percent annually. In the case of services, which employ more than 65% of total Iraqi workers, employment has been increasing annually at 2.4% in 2007‐12; less than half of the rate of growth of output in the services sector in the same period.

# **Population growth**

The simulation takes into account population growth and is particularly relevant in the Iraq case. The total population is projected to grow by 2.6% annually between 2012 and 2014, with the size of the working age population (from 15 ‐64 years old) growing by around 3.1% annually. We use official population projections by gender age groups and governorates provided by CSO. This adjustment is necessary to fully account for demographic changes that would affect the size and composition of the labor force and ultimately impact our estimates of the welfare measure (i.e. consumption or income per capita).

# **Changes in prices: Inflation**

All household and individual incomes from labor and non‐labor sources are expressed in real terms of the baseline year (constant in 2012 prices). Macroeconomic changes replicated on the micro data are also in real terms. This implies that in order to obtain projected poverty measures for 2014, the simulated household consumption will need to be compared against the poverty line of 2012.

In principle, there would be no need to adjust for prices given that all micro and macro components of the simulation are expressed in real terms. However, if food prices were to rise at a significantly different rate from the non‐food prices, the food basket to which the poverty line is anchored would become unattainable at an income equal to the poverty line.<sup>18</sup> Table 3 shows food CPI in Iraq is expected to increase at a higher rate than non‐food and general CPI between the business as usual and crisis scenarios. Thus, it is relevant to assess the sensitivity of the simulation results once the impact of higher relative food prices on poverty line is taken into account.

To do this we correct for differential inflation of food and non‐food items, by deflating the 2012 poverty line by the projected food and non‐food CPI, using the food and non‐food shares of the poverty line as weights. This method yields new poverty lines, which are then normalized to 2012 prices using the appropriate general CPI. For instance, the poverty line for 2012 after this adjustment is less than 1% higher than the poverty line in 2012 ( Table 4 ). In the Iraq case these adjustments are almost negligible but these are implemented for consistency. Note that the CPI in the crisis scenario is actual data.

> 18 To see how this can happen, note that the weight of food in the CPI is different from that in the poverty line. This implies that adjusting the poverty line by CPI would result in the same food basket (or calorie level) not being affordable if food price inflation were higher than that of general inflation, and conversely if food inflation were lower.

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