The response of the Australian states to a national economic shock: A statistical analysis of regional economic resilience

It is well known from the literature on regional business cycles in Australia that there are significant differences between the time-paths of economic activity of the Australian states. These differences must result from either differences in the response of the state economies to a common national shock and/or their response to state-specific shocks. The way in which a regional economy reacts to a national shock is closely related to the notion of regional economic resilience, a concept that has gained considerable popularity in the regional economics literature of the past decade or so. It has become common in that literature to distinguish between engineering resilience (the ability of a regional economy to return to the original equilibrium following a negative shock) and ecological resilience (the convergence of regional economies to new equilibria). The economic resilience of the Australian states is the focus of the research reported in this paper.

We analyse resilience within a vector-autoregressive (VAR)/vector-error-correction (VEC) model using monthly employment data for the states and the nation as a whole from the 2nd quarter 1978 to 1st quarter 2019. We find that employment growth rates are stationary so that, in terms of growth rates, the state economies are resilient in the engineering sense, although they may revert to equilibrium at different rates. The (log) levels of employment, however, are non-stationary but cointegrated, suggesting ecological resilience in employment levels since cointegration implies that the cointegrated variables return to (likely new) equilibria following a shock. We use a VEC model to identify a national shock, generate responses of the state employment levels to this shock and compare the resulting time-paths (the impulse response functions) to assess relative resilience. We find that Western Australia is the least sensitive of the states to a national shock and so the most resilient, while the economies of Tasmania and Victoria are the most sensitive to an adverse national shock and so the least resilient. The responses of the other states are all quite close to the national average response, indicating little difference in the resilience of New South Wales, Queensland and South Australia.