FORECASTING METROPOLITAN EMPLOYMENT USING AN EXPORT-BASE ERROR-CORBECTION MODEL

This paper shows that a time-series version of export-based location quotients, which decompose area employment into export and local components are co-integrated. Given the statistically established co-integrating relation between the time series for export and local employment, the Granger Representation Theorem tells us that an error-correction mechanism model is the appropriate time-series model specification. A set of forecasting experiments is carried out, in order to test whether the error-correction model produces better long-run forecasts that hold together in economically meaningful ways. Given the computer hardware and software that currently exist, the model developed here represents a simple, low-cost method for accurately forecasting local-area employment in the tradition of past work on export-base models.