Microsimulations are a highly useful methodological tool: by modelling the behaviour of individuals, households or businesses across different policy scenarios, they enable the ex-ante simulation of the likely effects of regulatory interventions, fiscal reforms or economic shocks. Such analyses provide governments, public institutions and international organisations with a forward-looking tool. ARCO works alongside local institutions and international organisations to study, model and test policies before implementing them, in order to analyse their impacts so as to reduce risks and improve the effectiveness of interventions and programmes aimed at poverty reduction, social protection and inclusive growth.
In a context where public resources are increasingly limited and social pressures are becoming ever more complex, the quality of policy decisions depends to an ever-greater extent on the quality of the analyses on which they are based. Traditional monitoring and evaluation systems, whilst being essential tools, tend to favour ex-post evaluations: they analyse what has already been implemented and draw lessons after the event. To give decision-makers greater scope, ex-ante analyses make it possible to anticipate unexpected consequences or compare alternative scenarios before committing resources.
What are microsimulations?
Microsimulations refer to a family of computational techniques that use micro-level data — typically from household questionnaires, labour market surveys or administrative records — to simulate how policies or external shocks affect individuals and households. These models can incorporate detailed information on demographic characteristics, sources of income, consumption patterns, and tax and social security systems, enabling the estimation of the fiscal, economic and distributional consequences of reforms or shocks.
Microsimulations are divided into two types:
- Static microsimulations model the immediate and direct effects of a policy change on a given population.
- Dynamic microsimulations take into account not only immediate effects but also changes over time, such as demographic shifts or labour market participation.
The choice between these generally depends on the objectives of the analysis, the availability of data and the time horizon considered.
Why are microsimulations important for institutions and organisations?
Ex-ante policy design. Unlike ex-post evaluations, microsimulations offer a forward-looking perspective. Ministries, local authorities, agencies and international organisations can test the potential impacts of a reform before it is implemented, thereby minimising risks and ensuring that resources are directed towards the most effective interventions.
Cross-sectoral flexibility. Microsimulations can be applied across a wide range of areas: taxation and social protection, labour markets, education, health, housing policy, and responses to economic shocks such as rapid rises in inflation or energy crises.
Managing trade-offs and policy coherence. Public institutions and organisations face complex trade-offs between economic growth, distributive equity and fiscal sustainability. Microsimulations help to make these trade-offs explicit, identifying who gains and who loses as a result of specific policies.
Microsimulations do not produce predictions but scenarios. This distinction is fundamental. The aim is not to ‘be right’ about how the future will unfold, but to construct a structured framework within which decision-makers, experts and stakeholders can explore the implications of alternative choices together. The focus shifts from the probability of outcomes to the causality of mechanisms — understanding why a policy produces certain effects is often more useful than estimating how likely it is to happen. Particularly relevant is the concept of wind-tunnelling: through microsimulations, institutions can subject their reform proposals to stress tests, verifying their resilience under adverse conditions or in extreme scenarios. This approach reduces decision-making uncertainty, increases the robustness of policies and — above all — shifts the institutional debate from a reactive to a proactive approach.
Communication, transparency and accountability. The results of microsimulations — often presented through impact distributions, incidence curves or analyses by income quintile — are effective tools for communicating with the public and civil society. Highlighting the distributional effects of a tax reform, a social security measure or a cash transfer programme contributes to transparency and strengthens the accountability of decision-making processes. For institutions that need to justify their choices to stakeholders, this is a significant added value
Microsimulation expertise in EU-funded projects and international cooperation projects
ARCO is the scientific coordinator of the SWINS project – Sustainable Wellbeing through Investments in Social Services (a project funded by the EU’s Horizon programme) – whose overall objective is to develop an effective framework for the ex-ante measurement of returns on social investment. The project involves microsimulation analyses based on a set of coherent and policy-relevant scenarios regarding the effects of investment in social policies and services across eight countries (Italy, Belgium, Hungary, Norway, Serbia, Ireland, Germany and Spain).
The microsimulations envisaged by the SWINS project serve to test the resilience of different policy configurations in the face of uncontrollable contextual trajectories, such as demographic changes, technological transformations, fluctuations in energy prices or the green transition, and of choices that can instead be modelled, such as labour policies, care policies and policies concerning the healthcare system and social services.
In other words, the simulations enable us to answer questions such as: if the context changes in this way, which combination of social policies yields the best outcomes — in terms of well-being, equity and fiscal sustainability?
As part of the PATHS2INCLUDE project (funded by the EU’s Horizon programme and led by the University of Oslo), the research team at ARCO’s Inclusive Development Unit used the EUROMOD platform — the European Union’s tax and benefit microsimulation model — to simulate the effects of reducing the gender employment gap in a number of European countries.
By combining EUROMOD with its Labour Market Adjustment (LMA) module, the simulations go beyond an analysis of immediate reforms: they explore the distributional consequences — in terms of poverty and inequality — and the fiscal implications of greater female participation in the labour market, estimating in particular how much additional fiscal space could be generated by higher female employment.
As part of a consultancy project for UNICEF, the research team at ARCO’s Inclusive Development Unit adapted the infrastructure of the OECD’s Tax and Benefit simulation model to the specific contexts of five low- and middle-income countries: China, Uganda, Bolivia, South Africa and Belarus.
This work enabled the simulation of trends in disposable income for different types of households under alternative policy scenarios. The results highlighted the dynamics of interaction between tax and social security systems and income distribution, offering concrete guidance on how targeted interventions in policy design can help reduce poverty and inequality.
As part of a consultancy project for UNICEF Tunisia, IRC UNICEF and the Centre de Recherches et d’Études Sociales (CRES), ARCO’s Inclusive Development Unit examined the impact of inflation on poverty levels in the country.
Using static microsimulations, the study estimated the impact of price changes on household welfare and national poverty levels, taking into account consumption patterns, household composition and the presence of children.
The analysis supplemented the available evidence, producing ex-ante estimates of expected poverty levels by the end of 2023 at a stage when observed data were not yet available. In this way, policymakers were provided with forward-looking guidance to help them promptly direct social protection responses.
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