Strong AUD = strong economy?

In my mind, the purpose of the economy is to put folks into work – folks who are employed live longer, are happier, have better marriages, etc.

Reading the comments on this blog, I thought of Krugman’s Nobel lecture, and wondered if there was evidence supporting the proposition that the mining sector, or the AUD, was truly bad for the employment – and hence likely to harm what I consider to the be economy’s ‘prime purpose’.

To get at this question, I regressed total annual employment growth on annual mining sector employment growth (#1 villain), annual manufacturing sector employment growth (the oppressed), the annual percentage change in RBA’s commodity price index (the bubble), and the annual percentage AUDUSD exchange rate (#2 villain). The latter two are monthly series, so I used the 3m YoY rate. The data spanned Q1-86 to Q4-11.

First surprise: the commodity price index isn’t significant – so I dropped it (not really a surprise once I thought about it, as the information should be in the currency and mining employment).

So I ended up estimating equation 1.

I included a single lag of the dependent variable, and of each of the independent variables; however, my main focus is on the long run multipliers, which were recovered easily enough (see equations 2 to 4).

So what did I find?

I found that more mining employment is good (there is no evidence of ‘dutch disease’), just as more manufacturing jobs are also good. Manufacturing jobs appear to have greater ‘spillover’ benefits – however I’ve not attempted to control for the fact that manufacturing employment is typically very cyclical (as global durable goods consumption tends to cycle with the global business cycle) – you get a sense of its leading character from the +ve coefficient on the lag, and the -ve on the concurrent term.

I also found that a stronger currency is associated with (slightly) faster employment growth.

Apart from mis-specification, there are a couple of stories that might make sense of this.

One is that manufacturing employs fewer people than services, and therefore the rising AUD tends to free up real income for relatively labour intensive services consumption.

Another is that a strong AUD is generally an indicator of a strong economy.