How does NZ’s productivity performance stack up?

Date: 
23/09/2013

In a new Productivity Commission Research Paper, we highlight that New Zealanders work about 15% longer than the OECD average to produce about 20% less output per person. Sure, the international wellbeing statistics paint us as pretty happy as a nation. But our average incomes lag behind, a direct reflection of our poor productivity record.

While better productivity contributes to higher incomes and material living standards, it only matters to the extent that it enhances the wellbeing of Kiwis. In other words, productivity growth is a means to the end of higher wellbeing. Improving our productivity increases the choices available to individuals and to the country. Blinder and Baumol say it best about productivity with “…nothing contributes more to the reduction of poverty, to increases in leisure, and to the country’s ability to finance education, public health, environment and the arts”.

There are three broad ways a society can lift incomes:

  1. work more;
  2. get better export prices in international markets; and
  3. produce more from each hour at work.

New Zealanders are already among the hardest working people in the OECD, so there’s limited scope left to increase incomes by working more. We have also done well out of terms of trade gains in recent years, but that won’t continue indefinitely.

That leaves (3) as the key driver of higher future incomes – lift our productivity by producing more with less. So how does New Zealand’s productivity performance stack up?

The answer, unfortunately, is not that well compared with other developed economies. Indeed, for the past 40 years New Zealand’s labour productivity has been slowly but surely falling behind other OECD economies. New Zealand’s labour productivity now ranks in the lower third of OECD countries and is similar to in Slovenia, Israel and the Slovak Republic. While we have been very good at increasing employment, we have been much less effective at extracting value from our collective work efforts.

The growing GDP per capita gap is driven by poor labour productivity performance

 Graph 1 of NZ GDP over time

Source:OECD.

Closer to home, the Australian economy has also been very successful at getting people into gainful employment and the two trans-Tasman economies have had remarkably similar employment growth since the mid-1950s. But Australian firms have been much more successful than their New Zealand counterparts at converting labour input into output. Specifically, since the late 1960s, Australian output has increased by around 4.5 times compared with 2.8 times in New Zealand, despite very similar patterns of employment growth.

In other words, Australian labour productivity has grown considerably faster than in New Zealand over a long period. This has been a key driver of the increasing income disparity across the two trans-Tasman economies.

The growing trans-Tasman labour productivity gap: same employment growth, faster output growth in Australia

Graph 2 - trans-tasman labour productivity gap over time

Source: The Conference Board.

Ordinarily, a lagging country would at least have one consolation – there’s plenty of room for improvement by catching up with more productive economies. However, historically, New Zealand has not only had a low level of productivity, but also one of the lowest rates of productivity growth in the OECD. This is unusual within the OECD group of countries and raises serious concerns about our productivity track record.

New Zealand’s generally poor productivity performance and the importance of productivity to our well-being underscores the need for New Zealand’s policy environment to be strongly supportive of productivity growth and for firms to have a clear focus on improving productivity. If we don’t arrest New Zealand’s productivity slump, we’ve got a lot to worry about ahead. This isn’t something we can put off till tomorrow for another generation to worry about; we need to confront the statistics now.

See our Productivity by the numbers page for more information, including the full research paper and "Cut to the Chase" Summary.

Written by:

- Paul Conway (Director Economics and Research)
- Lisa Meehan (Senior Advisor, Economics and Research)

Disclaimer: Blog posts are written by staff members and do not represent the official views of the Productivity Commission.

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