The simulations are also adjusted for population growth, using official population projections (disaggregated by gender and age groups) to fully account for demographic changes that would affect the size and composition of the labor force and, through that, the estimates of per capita household income. This is done by re-weighting households in the baseline data to replicate demographic changes predicted by population projections.

To simulate changes in _non-labor_ income, projections of aggregate changes in remittances are linked to baseline remittance information from household data using a simple assignment rule (rank-preserving regional transformation) to ensure that the total change in remittances received by households is equal to the projected change in remittances from the macro data. Some components of non-labor income are assumed to grow at the rate of aggregate GDP for the relevant period (profits, rents and domestic remittances), while others are kept constant in real terms at the 2010 year level (social benefits, pensions or other transfers, depending on the country).

The final step consists in using price projections to adjust the poverty line to reflect the difference in food and non-food inflation rates between baseline and projected year. Since the poverty line is typically anchored to a food basket that ensures a minimum calorie intake, in case where food inflation is expected to be significantly different from general inflation between baseline and projected year, the baseline poverty line would not be enough for a household to meet the basic food requirements in the projected year.<sup>12</sup> The income projections from the model can be used to produce a variety of outputs, including the aggregate poverty and inequality comparisons across groups, profiles of groups entering (and exiting) employment or poverty as a result of the evolution of the economy, and various measures of how the macroeconomic change is distributed across the population. The results from our simulation for Serbia presented below capture the likely impact of the growing period of the Serbian economy over 2011 on the household welfare.

# _2.2 Limitations and assumptions_

There are several limitations and assumptions to apply this method which are important to be mention. Firstly, the quality of model projections depends on the nature and accuracy of the data underpinning the exercise. The results would depend not only on the validity of the micro-models but also on the macro projections. In addition, the use of the last available household data (HBS 2010) as a comparator is tricky because the comparison could potentially attribute certain outcomes to that particular projection when they are a result of other factors that occurred over the period.<sup>13</sup> Secondly, the simulation relies on behavioral models built on past data that reflect the pre-existing structure of the labor market, household incomes and their relationships with demographics as they stood before the expected change. Consequently, the simulation assumes these structural relationships remain constant over the period for which projections are made. The more distant in the past the baseline year is, the more questionable this assumption is likely to be.

The model is limited in its ability to account for shifts in relative prices between different sectors of the economy as a result of the shock. While the poverty impact of shifts in the price of food relative to other prices is taken into account, other potential sources of price impacts are ignored – for example, the general equilibrium effect of a change in the terms of trade between agriculture and other sectors. In the absence of a CGE model, it is nearly impossible to explicitly model for changes in terms of trade between sectors.

The model works in the income space to account for different transmission channels through which households are affected. But to provide poverty projections for Serbia household incomes must be converted into consumption, using the assumption that the household’s ratio between consumption and income is constant over time. This questionable assumption has at least the advantage of being simple and transparent.

> 12 All macro and micro inputs used for the micro-simulation model are detailed in Annex 1.

> 13 It is a standard limitation for every “before-after” impact analysis.

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