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Understanding economic modelling and forecasting - be realistic about it

Comments on Lenore Taylor “Job forecasting a model for success”, 16/06/2009, http://www.theaustralian.news.com.au/story/0,25197,25642571-5017906,00.html

Economic model of forecasting of one type or another is no more than assumptions used in it. Most models are long run general equilibrium model. How many jobs will be lost or gained largely depends on the assumptions of wage flexibility.

In the short run, most modellers assume some sort of wage rigidity, so any perturbations like the ETS will cause job losses. In the long run, wage growth will be slower to resume full employment or near full employment. One does not need to be a modeller to know the results of ETS without renewable energies.

With renewable energies, more opportunities are generated to employ more labour. That is for sure, but it says little about the underlying welfare situation. Further, how many jobs will be created will depend on the quantity of those assumed renewable energies and the labour intensity of each of them.

The point is that whether it is short term job losses, or job absorption by renewable, they all depend on assumptions used. And those assumptions are based on the current labour intensities and the assumed future labour intensities. In the long term, there is no job impact, because people/labour will adjust to any future situations.

In some sense, it is meaningless to talk about job losses or gains of one sector or at one time, under one particular scenario. There are always other balancing factors working to offset that. One needs to be realistic about modelling and results from modelling.

Once one understands how models work and how modellers work, it is not too difficult to understand their results. Nevertheless, having models is much better than having no models, and that is why modellers or forecasters are the beneficiaries of any debates involving economic consequences, such as employment and welfare.

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