Quantifying Australia's "three speed" boom

Abstract

We examine Australia"?s terms of trade boom since 2003 with a particular interest in quantifying the links between the terms of trade and sectoral performance, conjecturing that a "?secondary services boom"? is primarily responsible for the widespread nature of the associated gains in employment. Elemental general equilibrium modelling is employed as numerical theory, to construct hypotheses for empirical assessment. The theory suggests a services expansion of sufficient scale to tighten the labour market but it indicates associated "?de-industrialisation"?. The empirical analysis addresses these hypotheses using vector auto-regressions estimated from pre-boom Australian data (1989 through 2002) and out-of-sample simulations over the subsequent boom period. The secondary services boom appears clearly in both income and employment, though the effects on manufacturing are ambiguous, with observed performance better than predicted by the numerical theory or the estimated VARs. This suggests that the recent boom accompanied changes in industrial structure and behaviour that favoured surviving manufacturing firms.