Quantifying Australia's 'Three Speed' Boom

This paper examines Australia’s terms of trade boom since 2003 with a particular interest in quantifying the links between the terms of trade and sectoral performance and identifying an associated ‘secondary services boom’. Comparative static general equilibrium modelling and empirical analysis are used to examine the sectoral impacts on employment and income. The modelling confirms the services expansion of sufficient scale to tighten national labour markets and it projects an associated manufacturing contraction. A separate empirical analysis approaches the same links 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 but the results on manufacturing are ambiguous. Actual employment booms were larger, and manufacturing sector performance better, than predicted on the estimated VARs, suggesting that the recent boom accompanied changes in industrial structure and underlying behavioural parameters that have been favourable to surviving manufacturing firms