Productivity

Productivity is about ‘working smarter’ rather than ‘working harder’. It’s a measure of how much output we produce from a given quantity of inputs.

Productivity is about how well people – individuals, businesses, countries – combine resources to produce goods and services.

Countries think about productivity as a comparison of national output – Gross Domestic Product (GDP) – to a measure of inputs (for example hours worked). It’s about how good countries are at turning their inputs – resources – into outputs. That is, how productive they are.

The Commission aims to lift New Zealand’s productivity and, as a result, lift the wellbeing of New Zealanders.

For more on productivity, why it matters and how to lift productivity, watch the following video and read Productivity by the numbers.

Productivity matters

New Zealand’s productivity performance is at the heart of achieving sustained higher living standards and greater wellbeing.

How productive we are as a country impacts our daily lives – for example, what healthcare we can afford, the quality of education available, how much we get paid, the interest rates we pay and how much time off work we can afford.

When productivity growth is stronger, real wage growth is stronger too. This may mean that more families can have decent incomes without having to work long hours.

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New Zealand’s productivity performance

Workers in New Zealand work longer hours and for less reward than workers in most other OECD countries. In short, New Zealand works harder rather than smarter. We are one of a small number of OECD countries with both a low level of labour productivity and low productivity growth. For the last 25 years or more New Zealand’s income per person has stayed at about 70% of that in countries in the top half of the OECD. 

So why is New Zealand's productivity performance so low?

It used to be said that New Zealand’s productivity performance was a paradox as it occurred despite policy settings in many important areas appearing at or close to best practice. Yet, rather than being a paradox this highlights how hard the challenge of lifting productivity in New Zealand is. 

New Zealand is unusual in the combination of its distance from international partners, small domestic markets, and industry structure. This works against the diffusion of new technologies and ideas into our economy and across businesses. Very few New Zealand businesses operate at the global frontier in their industry. And while New Zealand’s broader policy settings have been broadly sound and adaptive to the rapidly changing demands of COVID-19, there are barriers to the reallocation of resources to their highest value use.

How can New Zealand improve its productivity?

There is no reason to think that New Zealand cannot successfully lift its productivity performance, it is just that the path to success may be different to that of larger or more central economies. Turning around New Zealand’s productivity performance will require consistent and focused effort over many fronts and for many years.

The Commission has been at the forefront of research into the drivers of, and the barriers to, improved productivity. Our inquiries have detailed policy recommendations to improve performance in specific areas.

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Inquiries into boosting productivity

Inquiries are assigned by Ministers and constitute the bulk of the Commission's work. The Commission's inquiries have detailed policy recommendations to improve productivity performance in specific areas.

Recently completed inquiries

Among recently completed inquiries, the Government responded to the recommendations of our Low-emissions economy inquiry (completed in August 2018) with the establishment of a Climate Change Commission, the passage of the Climate Change Response (Zero Carbon) Amendment Act 2019, and strengthening of the Emissions Trading Scheme.

The Local government funding and financing inquiry (completed in December 2019) found that the property-based rates systems continued to be appropriate as the mainstay of local government funding in New Zealand. Some councils could make better use of their existing funding tools, and there is a need for greater transparency and accountability around decisions and performance. Upgrading local three-waters services to better meet existing and rising health and environmental standards will place many councils under funding pressure. Some smaller councils lack the scale to attract the necessary expertise to provide efficient services and often have weak rating capacity. Adapting to climate change (for instance through relocating infrastructure) will impose large costs on some councils in the medium term.

The Commission recommended that the Government extend existing funding models to find fair and sustainable ways for councils to meet this challenge. Councils serving fast-growing cities sometimes struggle to finance infrastructure to facilitate growth. The Government introduced legislation to support financing through special purpose vehicles, which was one of the recommendations of this inquiry.

Technological change and the future of work (completed in March 2020) assessed the potential impacts on work in New Zealand arising from technological change. It identified the importance of new technology for productivity growth, and attributed New Zealand’s poor productivity growth performance to low rates of technological adoption and diffusion. We recommended building on existing strengths such as a flexible and adaptive labour market and a well-educated workforce, while tackling areas of weakness. These include falling and uneven performance in the school system, which leaves children from socio-economically disadvantaged communities with persistently poor outcomes; and a poorly performing housing market that hinders workers moving to find the best job match for their skills.

The Commission recommended making training more flexible and accessible for workers, improving careers guidance, and providing greater income smoothing for displaced workers. The Government adopted the latter recommendation on a time-limited basis as part of its response to the COVID-19 crisis.

The New Zealand firms: reaching for the frontier inquiry found that New Zealand needs to take the lead from successful small advanced economies (SAEs), such as Denmark, Sweden and Singapore. These countries have outstanding records of exporting specialised and distinctive goods and services at scale and have achieved world-leading advantages in selected markets.

Central to these countries’ success are their leading (‘frontier’) firms, which invest heavily in innovation, are export-intensive, have scale and sophisticated governance and leadership. Such firms help small countries overcome the barriers of size and distance, as they provide the platform for innovation and exporting that drives productivity growth. To grow the size and number of frontier firms in New Zealand, the Commission recommended a number of
policy changes, including:

  • The Government should develop focus areas for innovation policy, to complement its broader and less targeted supports (eg, the R&D tax credit).
  • Regulatory settings in a number of sectors should be updated to improve competition and enable innovation.
  • Government policy should more consciously foster and learn from Māori frontier firms.

About completed inquiries.

Government plays a key role in lifting productivity

Since the late 1990s, successive governments have pursued economic strategies aimed at lifting economic growth and productivity through boosting innovation, diversifying the economy and shifting economic activity up the value chain. Common threads have included building a skilled workforce, increasing international connections, supporting research and science, deepening capital markets, and investing in infrastructure. This has resulted in on-going initiatives to foster and underpin innovation:

  • The New Zealand Venture Investment Fund was established in 2002 to deepen the early-stage capital market. Now called New Zealand Capital Growth Partners, it received a $300 million boost in Budget 2019.
  • The telecommunications sector has been restructured and reformed, and its infrastructure upgraded through the rollout of ultra-fast broadband.
  • Callaghan Innovation was established in 2013, to partner with businesses by providing a range of research and development (R&D) services, and to improve the operation of the innovation ecosystem. In 2019 an R&D tax incentive was introduced.

Supporting economic development 

The approach to supporting economic development has evolved over time and across governments, for example:

  • In 2019, the Labour-led government issued its Economic Plan for a productive, sustainable and inclusive economy. Priorities include sharing the benefits of growth more widely (reducing inequalities) and transitioning to a low-emissions economy. A number of strategies and initiatives sit within this economic plan, including an industry transformation strategy and a (draft) research, science and innovation strategy.
  • In 2018, the Ministry for Pacific Peoples published Pacific Aotearoa Lalanga Fou, which emphasised a need to develop more successful and sustainable Pacific entrepreneurs and Pacific-owned businesses.
  • In 2013, He kai kei aku ringa, the Crown-Māori Economic Development Strategy was launched, providing a vision and accompanying action plan for a more productive, innovative, internationally connected and export-oriented Māori economy. 

Turning around New Zealand’s productivity performance will require consistent and focused effort over many fronts and for many years. There is no simple quick fix.

Supporting the wellbeing of New Zealanders

New Zealand's laws, policies and institutions support the wellbeing of New Zealanders. The Commission provides the Government with independent policy advice and research to improve productivity. Whilst the Government is under no obligation to implement the Commission's recommendations nor to respond to its reports, in practice the Government has issued formal responses to most inquiry reports, specifying which recommendations it agrees with and will implement.

The Government’s responses to the Commission’s inquiry reports are published by the Treasury here.

For more on how to lift productivity, read Productivity by the numbers.