# **Aggregate effects**

## **Labor market outputs and welfare levels**

Table 5 presents information on projected changes in employment status: employed and non‐employed. The latter is a combination of being inactive or being unemployed. The size of the labor force is predicted to grow as consequence of population growth in both scenarios. The additional 1.2 million potential workers would increase pressure into a non‐dynamic labor market, particularly, in the crisis scenario where the economy would have diverged significantly from its natural path. This would represent an extra 800,000 non‐employed Iraqi workers relative to BaU levels.

Employment shares by main economic sectors change between the two scenarios. There is a shift from the manufacturing and construction sector to agriculture and services sectors. This would represent a change from more productive/higher earnings jobs to less productive/lower earnings. However, these changes most likely cover fluctuations in the composition of sectoral employment not captured by the model such as changes in shares of formal and informal employment within a sector.<sup>21</sup> The household income projections from the micro‐simulation exercise are presented in Table 7. On average, labor income per capita represents more than 65% of total income per capita in the baseline 2012. Total household income per capita decreases almost 14% in crisis relative to business as usual as a consequence of a reduction in labor income of 20%, a much smaller fall in non‐labor income and services from dwelling, almost 5 and 2 percentage points respectively. The reduction in non‐labor income between scenarios would be the result from a reduction in both types of transfers: public and private (3 and 5 percentage respectively) for the country as a whole (Figure 3).<sup>22</sup> Similar patterns are observed across regions. However, the magnitude of these impacts are higher in IS‐ affected and Kurdistan regions than in other regions. For instance, total income would have cut almost by half in IS‐affected areas and by 17% in Kurdistan both as a result of labor and non‐labor income (Table 7). In the case of other regions (i.e. Baghdad, Rest of North, Centre and South) would have suffered a much less reduction in both labor and non‐labor incomes (Figure 3).

The increase in unemployment rates combined with the reduction in labor as well as non‐labor income are reflected in lower levels of per capita consumption. The simulation results show a 10% reduction in average consumption per capita for Iraq as a whole. This is 4 percentage points lower than the decrease estimated in total income (–14%) which seems reasonable given that households might smooth consumption during difficult events and over time.

> 21 This is one of the limitations of this approach and it is based on the difficulty to obtain macroeconomic projections for formal and informal employment changes by economic sector. We are considering an extension to the model in future work given the importance of the issue from a distributional angle.

> 22 Public transfers include: PDS, pensions, social protection network compensation and other public transfers in cash and in kind. Private transfers include domestic and international remittances, capital and other private transfers in cash and in kind. The latter are assumed to move at the same growth rate as the total economy.

16