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Poor productivity hurts living standards

Productivity by the numbers

Research released today by the Productivity Commission highlights the cost of New Zealand’s poor productivity performance.

12 June 2019

New Zealand’s labour productivity growth has underperformed for decades and has fallen further in the 10 years since the Global Financial Crisis. Between 2008 and 2018, labour productivity growth in the measured sector averaged just 1.0%, down from 1.4% since 1996. The Treasury’s fiscal models assume long-run labour productivity growth across the total economy of 1.5%.

The Productivity Commission estimates that if the recent slowdown was to become permanent then, holding all else constant, over 40 years the economy would be 18% smaller than otherwise. This is equivalent to $16,300 per person. As an example of what this means in practice, the value of New Zealand Superannuation to recipients, which is indexed to wage growth, would be 21% lower than in a higher productivity case.

The report, Productivity by the Numbers: 2019, benchmarks New Zealand’s productivity performance with OECD countries. It shows that poor labour productivity growth is the reason New Zealand’s GDP per capita remains 30% below the average of the top half of the OECD. In New Zealand the hours worked per person have been consistently high, while labour productivity (output per hour worked) has been low.

Low productivity does not only hurt New Zealanders’ wallets. When productivity growth is lower, wage growth tends to be lower too, meaning some families need to work long hours to achieve decent incomes. The result is they have less time to spend with family and in the community.

Likewise, improving energy and fuel efficiency, along with lifting agricultural productivity, can help lower greenhouse gas emissions per person or unit of output, and help the shift to a low emissions economy.

As Dr Patrick Nolan, one of the report’s authors, said: “The economy is like a car stuck in first gear, where faster growth comes from revving the engine rather than driving more efficiently. This comes at a real cost to living standards. Lifting productivity would shift the economy into higher gear and put economic growth on a more sustainable footing.”

For further information, please contact Dr Patrick Nolan, Director, Economics and Research.