The second graph presents distributional projections for 2010. In contrast to previous graph, this shows a relatively good fit for the lower part of the distribution which mirrors insignificant differences between actual and projected poverty incidence. However, it still produces higher indices for depth and severity of poverty and it overestimates consumption levels in upper quantiles of the distribution.

# _5.3 Factors that bias the projections_

The overestimation of the 2009 poverty rates is due various factors coming from limitations and assumptions of the simulation model. Firstly, in Section 2 we point out the strong assumption of constant consumption to income ratio over time. Figure 6 shows significant differences between these ratios across the distributions, particularly in the lowest deciles between 2008 and 2009. This could be interpreted as changes in consumption or saving patterns which present a turning point during the year of the crisis. Unfortunately, the micro-simulation model does not allow for consumption smoothing via savings or borrowing and projections are biased when using 2008 as baseline year.

Given we are using ex-post macro and micro data; it is possible to identify other factors that may contribute to this bias in the projection for 2009. One possibility is the divergence between macro and micro inputs dynamics. Figure 7 present annual growth in labor, non-labor, total income and consumption per capita based on HBS data from 2008-2010, together with GDP dynamics. During 2008-09 labor income declined, in line with GDP dynamics, and much more sharply than consumption. This decline in labor income is captured explicitly by the microsimulation model. On the other hand, non-labor income increased, in line with movements in international transfers, such that total income growth during this period was positive. Even though the model applies a 50% increase in remittances between 2008 and 2009; this component contributes only with 2% of total household income not enough to counterbalance the reduction in labor income.<sup>19</sup> Thus, the dynamics of macro and micro inputs appear consistent, but there still is a problem in tracking the movements from the non-labor income side.

The poverty impact of the crisis has been cushioned by the expansion of social assistance programs and of unemployment benefits in 2009.<sup>20</sup> According to administrative data, spending on the material support for low income households program (MOP) – the flagship last resort social assistance program – increased by 16.8 percent in real terms between 2008 and 2009, a higher rate of growth than in the previous year (12.6 %) or subsequently during 2009-2010 (4.9%).<sup>21</sup> Likewise, unemployment benefits increased by 10% in real terms during 2008-2009 (only 1.2% during 2007-2008) and the number of beneficiaries of UB increased by 19% (only 2% during the previous year).

The expansion of social assistance and unemployment benefits is again not well captured by the HBS data, which is due to the small coverage of the programs in the overall population. For instance, according to HBS data the share of households receiving MOP declined from 2.7% of total to 2.5% between 2008 and 2009; those receiving children’s allowances remained stable and the share of individuals receiving back to work receipts<sup>22</sup> has also fallen in 2009. However, non-labor income increment is driven by pensions, which the microsimulation model assumes to remain constant in real terms between _t_ and _t+1._<sup>23</sup> To address this, we can alternatively aggregate all social protection payments<sup>24</sup> and allow them to grow at the growth rates observed in HBS data, i.e. 14% between 2008 and 2009 and 1.6% between 2009 and 2010. The

> 19 See Annex 1

> 20 Habib et al. (2012) similarly find transfer schemes and automatic stabilizers to have a cushioning impact on the poverty increase due to crisis in Poland.

> 21 The expansion of the MOP appears to be primarily in terms of budget, rather than beneficiaries – the number of beneficiaries grew by 7% during 2007-2008 and by 9% during 2008-2009.

> 22 Back to work receipts are benefits provided to the unemployed who have been employed in the past. The amount of benefit is in function of the duration of past employment.

> 23 This item includes various pension payments such as those related to old-age, disablement, family pensions, protection contributions and other contributions

> 24 Including pensions, social assistance and unemployment benefits as one category within no labor income.

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