macroeconomic assumptions underlying the scenarios in Section 4. Section 5 presents the simulation results, and section 6 concludes.

# **2 Methodology**

The micro-simulation model is based on a simplified version of the approaches developed by Bourguignon et al. (2008) and Ferreira et al. (2008). As outlined in Habib et al. (2010a, 2010b, 2010c), the method models the way macroeconomic shocks are transmitted to the labor market in the form of (i) loss of employment and labor earnings and (ii) loss of non-labor incomes in the form of international remittances. The micro-simulation combines macro-level information on the projected growth of output, employment, remittances, labor earnings, population, and prices with micro-level information on labor and non-labor income, labor force status, and basic job characteristics.<sup>1</sup> The micro-simulation model involves three basic steps: (i) benchmark, (ii) simulation, and (iii) assessment of the impact. The first step uses household -and individual- level information to model labor market behavior and the receipt of remittances. Labor force ‘status’ is divided into six categories<sup>2</sup> and is modeled as a function of household and individual characteristics. Parameters are estimated by means of a multinomial logit estimation as in Ferreira et al. (2008). Labor earnings for all employed individuals are then modeled as a function of individual and job characteristics and parameters are estimated by means of a Mincerian OLS regression. An assignment rule for remittances is then modeled, non-parametrically.

<u>The second step</u> simulates the process by which macro-level changes (projections of population growth, labor force status and earnings, and international remittances) are translated into changes in the labor market and into labor and non-labor income at the micro-level using the estimations obtained in the –baseline step. This simulation step is divided into four stages. First, demographic changes between the base year of 2011 and the year of the crisis are adjusted to replicate population growth projections. Second, aggregate flows between employment and unemployment as well as between sectors of employment are used to project labor force status and earnings at the micro-level using the multinomial logit and the Mincerian OLS estimations from the baseline step. Third, the assignment rule for remittances is followed to allocate aggregate changes in remittances at the microlevel. Fourth, minimal assumptions are used to simulate changes in other sources of non-labor income.

The model simulation relies on a series of assumptions in order to make microeconomic data consistent with macroeconomic projections, using behavioral estimations from pre-crisis household economic data to predict future economic outputs. In this sense, besides the obvious need for reliable macroeconomic data at the sector level, the model requires a series of assumptions to be

> 1 A recent module of the ADePT software has been developed for micro-simulations: the “ADePT Simulation” module, which has been used for all the micro-simulations in this paper.

> 2 The categories are inactive, unemployed and employment in the following four sectors: primary sector (agriculture, fishing, and mining), manufacturing (including electricity, gas, water and construction), commerce, tourism and transport, and lastly other services (financial and government services).

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