# **5. Validation**

We test the model’s performance by conducting a validation exercise. The validation is carried out by using 2005 data to predict 2008 indicators and then comparing the predicted 2008 indicators with actual 2008 indicators. Specifically, we estimate the model parameters limiting ourselves to the EU-SILC data for 2005. We then apply those estimated parameters to the actual data for the independent variables in 2008 to predict the values of poverty and social exclusion indicators in 2008 and, finally, we compare those findings to the actual 2008 findings. This test helps to understand the strengths and limitations of the simulation model. Although this is a less demanding scenario than the simulations for 2020, it is nevertheless informative.

To validate the model’s performance at simulating at-risk-of-poverty and anchored poverty rates, we estimate equations (2) though (4) above using EU-SILC 2005 data.<sup>13</sup> For the validation, instead of using national education and employment targets, we use the actual 2008 aggregate data for education attainment and employment rates. This allows us to simulate labor income for each individual in 2008, which we then plug into equation (1) to compute the total household income. Finally, we compute the at-risk-of-poverty and anchored poverty rates and compare those findings to the actual at-risk-of-poverty and anchored poverty rates using the EU-SILC 2008 survey. The simulation model’s performance with severe material deprivation and limited work intensity is similarly evaluated by comparing the simulated results using EU-SILC 2005 data with the actual results obtained with EUSILC 2008 data.

The simulation model predicts 2008 at-risk-of-poverty rates reasonably well using EU-SILC 2005 data for both new and old EU Member States (Table 5). In most cases, the simulated at-risk-of-poverty rate is within 2 percentage points of the actual 2008 at-risk-of-poverty rate. However, in Latvia, Lithuania, and Sweden, the change in at-risk-of-poverty rates between 2005 and 2008 is not well predicted by the simulation model. A Oaxaca-Blinder decomposition confirms the underlying reason for this: the change in at-risk-of-poverty rates between 2005 and 2008 is more strongly related to a change in the structural relationship between individual/household characteristics and outcomes, rather than to changes in individual/household characteristics (see Annex). To take some account of this, we add an adjustment to the constant term in equation (2), such that simulated growth in labor income is consistent with projected GDP per capita growth, which is based on post-crisis forecasts. While this approach does help ensure greater consistency between household incomes and projected macroeconomic aggregates, it is admittedly somewhat ad hoc, and an approach that allowed for the coefficients to change over time would most likely provide a truer representation of the structural relationships.

The 2008 low work intensity rates are predicted reasonably well by the simulation model using EU-SILC 2005 data in both old and new EU Member States. The exception, however, is Hungary, where

> 13 Bulgaria and Romania did not conduct EU-SILC surveys in 2005, and are thus excluded from the validation exercise.