CGE modelling of the resources boom in Indonesia and Australia using TERM

Table 4. Impact of change in international trade prices on major aggregates by region
Percentage change relative to base case

In the short-run closure we have chosen, national aggregate investment is exogenous.
However, investment shares can vary markedly between regions and sectors. This is
evident both in the lower part of table 3 (showing a decomposition of outcomes for the
biggest winner, Mineral_WA, and the biggest loser, Urban_SA) and in table 4, in which
virtually all of the non-mining regions suffer a decrease in investment, while investment
in mining-intensive regions booms. Mineral_WA and Mineral_QLD both experience an
increase in investment exceeding 25 percent. Only four regions out of the 18 experience
an increase in real wages. This is a highly relevant assumption of the simulation. In the
minerals boom of the 1970s, economic gains to Australia were eroded by spiralling
wages, so that unemployment increased despite the boom. Our assumption in the labour
market is that national employment is fixed, with real before-tax wages allowed to vary
nationally. At the regional level, we assume that labour is imperfectly mobile, with inter-
regional migration partly, not completely, offsetting regional real wage differentials.
Hence, real wages fall by 1.6 percent in Other_SA, while, at the other extreme, they rise
by 4.2 percent in Mineral_WA.

Had we assumed that real before-tax wages were fixed, national employment would have
fallen slightly, as most of the benefit of the terms of trade shock is in relatively capital-
intensive sectors, whose output growth is hindered by our assumption that capital stocks
are fixed in the short run. The state and Federal governments have had windfall gains
from resource rents and increased company tax revenue due to the resources boom. Some
of this revenue was given back to workers in the form of income tax reductions in the
Federal May 2006 budget, so that it is possible that real after-tax wages could rise at the
same time as real before-tax wages fall.

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