The Cyclical Dynamics and Volatility of Australian Output and Employment

In this paper, we examine the volatility of aggregate output and employment in Australia with the aid of a frequency filtering method. This analysis is compared with more traditional methods based on the examination of first differences in the logs of the raw data. We show that the application of univariate AR and bivariate VECM methods to the data results in a detrended series which is dominated by noise and gives break points which are not robust to alternative decomposition methods. When we apply a frequency filtered procedure we find that the detrended series is dominated by cyclical rather than noise variation. We find evidence of a sustained reduction in the cyclical volatility of both the gross domestic product and employment series in 1993-1994, not in 1984. We also find that there is a clear association between output volatility and employment volatility. Copyright © 2008 The Economic Society of Australia.