Considering Labor Informality in Forecasting Poverty and Inequality: A Microsimulation Model for Latin American and Caribbean Countries

Kelly Montoya Muñoz, Sergio Daniel Olivieri and Cicero Augusto Silveira Braga

No 10497, Policy Research Working Paper Series from The World Bank

Abstract: Economists have long been interested in measuring the poverty and distributional impacts of macroeconomic projections and shocks. In this sense, microsimulation models have been widely used to estimate the distributional effects since they allow accounting for several transmission channels through which macroeconomic forecasts could impact individuals and households. This paper innovates previous microsimulation methodology by introducing more flexibility in labor earnings, considering intra-sectoral variation according to the formality status, and assessing its effect on forecasting country-level poverty, inequality, and other distributive indicators. The results indicate that the proposed methodology accurately estimates the intensity of poverty in the most immediate years indistinctively of how labor income is simulated. However, allowing for more intra-sectoral variation in labor income leads to more accurate projections in poverty and across the income distribution, with gains in performance in the middle term, especially in atypical years such as 2020.

Date: 2023-06-22
New Economics Papers: this item is included in nep-cmp, nep-for and nep-iue
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