The macro-micro modeling framework described here explicitly considers long term time horizons during which changes in the demographic structure may become a crucial component of both growth and distribution dynamics. The GIDD’s empirical framework is schematically represented in this figure.

The expected changes in population structure by age (upper left part of the figure) are exogenous, meaning that fertility decisions and mortality rates are determined outside the model. The change in shares of the population by education groups incorporates the expected demographic changes (linking arrow from top left box to top right box in the figure).

Next, new sets of population shares by age and education subgroups are computed and household sampling weights are re-scaled according to the demographic and educational changes above (larger box in the middle of the figure). The impact of changes in the demographic structure on labor supply (by skill level) is incorporated into the CGE model, which then provides a set of link variables for the micro-simulation:

• (a) change in the allocation of workers across sectors in the economy,
• (b) change in returns to labor by skill and occupation,
• (c) change in the relative price of food and non-food consumption baskets, and
• (d) differentiation in per capita income/consumption growth rates across countries. The final distribution is obtained by applying the changes in these link variables to the re-weighted household survey (bottom link in the figure).

The GIDD’s methodology is explained in full detailed in the following working paper:

Bussolo, M., De Hoyos, R., and Medvedev, D. (2008). “Economic Growth and Income Distribution: Linking Macroeconomic Models with Household Survey Data at the Global Level”, The World Bank.

Presentation prepared for the 30th General Conference of the International Association for Research in Income and Wealth, Portoroz, Slovenia, August 24–30, 2008.