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Productivity and the challenges approaching Aotearoa New Zealand

This section sets out key elements of Aotearoa New Zealand’s productivity experience. It focuses on:

  • setting the scene for Aotearoa New Zealand’s relatively poor productivity and the global megatrends likely to impact it
  • identifying some key factors that could drive improvement
  • signalling the potential of focused productivity efforts to support Aotearoa New Zealand to be resilient in the face of approaching challenges.

Aotearoa New Zealand has a longstanding problem with productivity

Aotearoa New Zealand has a longstanding problem with low productivity relative to its peers, and persistently low productivity growth over the past few decades. Since the 1970s, there has been a long period of relative decline, with Aotearoa New Zealand’s position relative to other OECD countries stabilising in the 2000s (New Zealand Productivity Commission, 2023c). 

Growing productivity lifts incomes, increases output and the possibility of more time for leisure, and is one of the key factors that improve material living standards. 

Growing productivity also increases Aotearoa New Zealand’s ability to fund and expand access to public goods such as education, healthcare and infrastructure, and to achieve socially desirable outcomes such as reducing poverty. Done well, this ensures that the benefits of productivity are shared across the population, and can help to mitigate any negative effects including inequitable outcomes.

As shown in Figure 1, Aotearoa New Zealand’s productivity performance over the last few decades reflects the result of working harder and longer, and not smarter. As the diagram shows, labour input formed a large proportion of net total growth (indicated by the diamond) between the period from 2000 to 2020, relative to other inputs. That is, the nation is missing opportunities to invest in the factors that help drive productivity growth (New Zealand Productivity Commission, 2023c). 

Figure 1: Contribution to economic growth based on labour, capital, and multifactor productivity based on OECD data (New Zealand Productivity Commission, 2023c)

Aotearoa New Zealand’s workers have also been producing less for every hour worked compared to workers in many other OECD countries for half a century. Figure 2 illustrates the impact of this trend in terms of output per hour worked comparative to other OECD countries in 2019.[2] How could Aotearoa New Zealand improve its productivity performance towards the results of best-in-class countries, such as Denmark? 

Figure 2: Hours worked per year vs output per hour relative to the OECD average, 2019 (New Zealand Productivity Commission, 2023c)

There is no “silver bullet” for productivity growth – but targeting our efforts can support improvement

The reasons for Aotearoa New Zealand’s relatively low levels of productivity growth have been attributed to a range of potential factors. Some of these are beyond our direct control, such as distance from global markets and small market size. Many successful economies are small, but they are almost exclusively part of, or close to, larger trading areas (for example, the European Union), so cannot be easily compared to New Zealand. 

Improving productivity will require long-term commitment and targeted effort across the range of factors that inform productivity. No single lever is likely to result in transformational change. Rather, improvement will be delivered by sustained and coordinated effort across key levers within the economy (New Zealand Productivity Commission, 2023c).

In its bi-annual publication Productivity by the Numbers, the Commission identified several key drivers and enablers of productivity where improvements could be made. These drivers and enablers are summarised below.

  • Innovation is the engine of growth and is the dynamic process through which economic factors create new economic value by creating, adopting and adapting technology or knowledge into new or improved products and services, or by improving operational, organisational and managerial processes and approaches to marketing.
  • Investment, capital, and financial markets also play a key role in improving productivity, in particular by increasing Aotearoa New Zealand’s currently “shallow” levels of capital stock (New Zealand Productivity Commission, 2021).
  • International linkages are important for productivity and economic performance, allowing Aotearoa New Zealand to gain from specialisation, and providing mechanisms for the transfer of technology and knowledge, market access, and fostering business relationships.
  • Management capability has significant impact on organisational performance, and effective governance, and skilled managers add to productivity and profitability by creating an environment where innovation and skills development can flourish.
  • Skills and education are fundamental to economic development, because more highly educated, skilled and talented people tend to be more innovative and productive (Earle, 2010; Lucas, 1988, 2015; Sianesi & Van Reenen, 2003).
  • Infrastructure plays a key role (for example, by increasing the connectivity between people, information, and goods and services), and is important for the delivery of essential services that drive social and health outcomes.
  • Institutions – cultural, economic, legal, political and social – play an important role in setting social rules and norms. These support productivity by enabling a well-functioning economy and society by, for example, providing a common framework or mutual understanding for economic transactions and social interactions.

All these factors play a role in determining productivity performance. However, as a country, Aotearoa New Zealand should target its efforts towards those areas most likely to lift its productivity performance.

Helpfully, other countries (including the United Kingdom and Australia) have recently been considering their productivity performance and priorities. The Australian Productivity Commission in particular has recently undertaken a comprehensive look at the barriers to future productivity growth, and has set out a policy agenda to overcome these barriers (Australian Productivity Commission, 2023). Likewise, in October 2023 the UK’s Productivity Institute published The Productivity Agenda, a blueprint for boosting the UK’s productivity (The Productivity Institute, 2023). 

These documents highlight the striking similarity between many of the productivity challenges faced by those nations and those experienced in Aotearoa New Zealand, despite obvious differences in geography, demographics, political and economic structures and policy settings. By looking at what is consistent across the international efforts to address these challenges, we reason that priorities identified by those bodies are likely to have significance for Aotearoa New Zealand too. Of course, New Zealand will also have specific issues not faced elsewhere that are also critical to address. Taking both elements together, we have identified some key areas where further effort is required: innovation and diffusion, human capability, investment in capital, and institutions. 

Innovation and diffusion

Innovation is fundamental to improving living standards generally and to productivity growth. It is not necessary – or possible – for every firm to innovate, but productivity performance is further driven by diffusion of innovation – when firms beyond the innovators act to adopt new technology and better practices developed elsewhere.

In the Aotearoa New Zealand context, innovation rates – including through uptake of new technology – are comparatively low across the economy (New Zealand Productivity Commission, 2020). In some instances, this has been the result of deliberate settings – for example, regulating to limit the uptake of genetically modified products. With a small domestic market, the incentives to compete by investing in creating or adopting new technology are relatively low.

Some unique characteristics of Aotearoa New Zealand’s economy reinforce its challenges in more effectively pulling the lever of innovation and diffusion to drive domestic productivity growth. For example, the relatively low levels of investment across the economy in research and development (OECD Main Science and Technology Indicators - OECD, n.d.)will limit innovative potential. In addition, the prevalence of smaller firms (Battisti et al., 2010) may hinder potential opportunities to diffuse the innovation that does occur. Noting that, while most innovation globally occurs within the most productive “frontier firms” and may not be taken up at scale across other parts of the economy, having a larger proportion of smaller firms may magnify this impact. 

The Frontier Firms inquiry found that the most promising path for Aotearoa New Zealand to lift its productivity is to foster the development of innovation ecosystems (New Zealand Productivity Commission, 2021, 2023b).

The OECD has pointed to digital technology and its adoption as a key lever to increase innovation and improve productivity in Aotearoa New Zealand (OECD, 2022b). Technology and skills are together called the twin engines of growth (Stokey, 2021).

Human capability

A focus on human capability relates to the role of skills and education as a key enabler of productivity. Highly skilled and educated people create and embody knowledge and ideas, and help facilitate the uptake of ideas from within Aotearoa New Zealand and internationally. 

Although the percentage of adults of working age with a bachelor’s degree or higher in Aotearoa New Zealand is close to the OECD average (New Zealand Productivity Commission, 2023c), the New Zealand-born population living overseas has notably higher rates of qualification attainment. This impacts the supply of skilled labour available domestically, and is commonly referred to as the “brain drain” (New Zealand Productivity Commission, 2022a). Student performance at secondary (high school) level has also been declining, in both relative and absolute terms (New Zealand Productivity Commission, 2023c). 

Aotearoa New Zealand has traditionally had a greater proportion of its workforce supplied through immigration to fill skill gaps over the short term and long term, including to replace the skill losses incurred by New Zealanders moving overseas. In its inquiry into immigration settings, the Commission identified the important interactions between immigration and the skills, education and training system, and recommended better coordination with labour market skill needs through the development of a Government Policy Statement (New Zealand Productivity Commission, 2022b).

The importance of building a skilled workforce that matches the needs of the future economy was a common theme across productivity agendas in Aotearoa New Zealand, Australia and the United Kingdom, as well as the OECD (OECD, 2019). For example, one of the reform pillars identified by the Australian Productivity Commission focuses on the importance of lifting educational quality and outcomes to support a more adaptable workforce. This focus also acknowledges shared challenges resulting from the ageing workforces in developed economies.

Aotearoa New Zealand invests in human capability not only through its skills and education systems, but also through the efforts it expends to keep people healthy so that they can continue to contribute in the workforce and to society. 

Investment, capital and financial markets

Investment, capital, and financial markets were identified as a key driver of productivity across all countries considered.

Aotearoa New Zealand has relatively low levels of capital stock (as measured by gross fixed capital formation)[3] compared to its peers in the OECD, and generally there is a link between capital intensity[4] and higher levels of productivity (New Zealand Productivity Commission, 2023c). Aotearoa New Zealand’s distance from global markets and small market size pose unique challenges. Both may affect the costs and barriers of importing capital and integrating into global supply chains, or have implications for competition settings where large firms may be more able to exercise monopolistic powers. 

Well-functioning financial markets also allow firms to access finance for investments, and Aotearoa New Zealand is known to have both lower levels of venture capital and a smaller equity market (for example, the NZX, New Zealand’s stock market) for the size of its economy than other developed economies (Levine, 2004; New Zealand Productivity Commission, 2023c).

Investment in capital across the economy is a focus for pro-productivity efforts internationally, by building the asset base that enables labour to become more efficient over time. The precise reasons for underinvestment are likely caused by multiple factors. Yet the three countries we considered (Aotearoa New Zealand, Australia and the United Kingdom) identified the need to improve market settings, such as the need to promote competition, efficiency and contestability in markets. 


Government and institutions are also key drivers for productivity in Aotearoa New Zealand, Australia and the United Kingdom. These drivers influence laws and regulations, taxes and spending, and the broader settings that influence productivity – such as business and social norms, regulatory quality, and trust (Kaufmann & Kraay, 2023). The business environment in Aotearoa New Zealand is generally favourable, with low costs of entry for businesses (World Bank, 2020).

Aotearoa New Zealand also leads in terms of its institutional quality on measures such as government effectiveness and regulatory quality (OECD, 2022a). However, levels of trust in government and democratic institutions have declined across English-speaking countries (OECD, 2022a). Trust, built from a foundation of strong social cohesion and collaborative processes, will play a key role in enabling societies to address future collective challenges, such as climate change (Koi Tu: The Centre for Informed Futures, 2023). 

There is also the need to lift productivity in the non-market sector. A core focus should be on the public sector, which accounts for almost one-fifth (Public Service Commission, 2023) of all employment in New Zealand. It is large, and the services provided are critical – with many being provided to the most vulnerable members of society. The public sector also provides services to the rest of the economy: setting and maintaining regulations, enforcing the rule of law, providing and supporting physical and knowledge infrastructure, undertaking and funding research, supporting people in need, and building a healthy and educated workforce. 

It is imperative that the business of government is undertaken effectively and efficiently, to prevent costs from being felt across society and the economy. These costs are not paid in lost shareholder value, but in lost opportunities, ill health, and low levels of wellbeing for the people they serve. The Commission has already examined this area (New Zealand Productivity Commission, 2019), and attention is needed to address institutional fragmentation and the lack of joined-up policies as a result of bias towards short-term thinking and silos between government agencies (New Zealand Productivity Commission, 2023a). 

Aotearoa New Zealand also has unique challenges and opportunities relating to land and te ao Māori 

We also considered what opportunities Aotearoa New Zealand may have that are unique to our circumstances and culture. In particular, we consider that land use and the opportunities posed by te ao Māori represent useful areas where further focus could be placed, beyond the drivers identified by international evidence and experience. 

Land use

The role of the natural environment and the utilisation of land plays a particularly strong role in how Aotearoa New Zealand addresses its productivity challenges compared to its peers. The reasons for this difference include the cultural significance of whenua to Māori and the prominence of the primary sector – which uses large amounts of land – to the trade and economy of Aotearoa New Zealand. For example, the scale and location of agricultural activity creates competition for the best use of productive land around the rural and residential/urban boundaries, which can create challenges to manage the trade-offs between meeting the needs of growing populations, the export economy, demand for housing, and long-term sustainability of Aotearoa New Zealand’s environmental resources (Ministry for the Environment, 2021). 

Pressures on housing and infrastructure also signal that land could be used more efficiently, and the resource management system has been identified as an important lever to address these pressures (New Zealand Infrastructure Commission, 2023; New Zealand Productivity Commission, 2015). These challenges may also be symptomatic more broadly of an economy that relies on residential property as a form of investment and wealth accumulation. 

Economic growth achieved through environmental depletion – including sub-optimal land allocation – may also reduce the potential resources available for future years and the potential wellbeing of future generations (Au & van Zyl, 2018). The intensity of land use also has flow-on impacts to biodiversity and human health (Ministry for the Environment, 2021).

The challenges inherent in balancing the competing interests and objectives of the economy, agriculture, resilience and environmental sustainability in land use decisions has also been recognised domestically by Koi Tū – the Centre for Informed Futures (Koi Tū: The Centre for Informed Futures, 2023). Koi Tū notes that “New Zealand’s prosperity is intricately tied to land and the downstream consequences of poorly regulated and utilised land use is being felt and will be aggravated by climate change”. Accordingly, they call for “a game-changing shift in land-use-oversight that unambiguously links economic prosperity and community resilience with environmental wellbeing”.

Te ao Māori

Te ao Māori presents a unique opportunity to take an Aotearoa New Zealand-specific lens on productivity, and to address the challenges this nation faces in ways that build from its existing strengths and resource base.

This has been a core message reflected to the Commission over many years and through engagement with successive inquiries. Analysis of key themes raised by Māori stakeholders or on te ao Māori issues through inquiries over the last six years identified the importance of taking an intergenerational and collective approach to understanding Aotearoa New Zealand’s productivity challenges and opportunities. Some significant recurring issues raised included:

  • The intergenerational perspective and long-term approach of Māori presents opportunities and challenges for Māori businesses and for Aotearoa. By looking to Māori perspectives and a te ao Māori worldview, grounded in Te Tiriti, there may be potential to take new and innovative approaches to managing productivity challenges (Millin & Mill, 2021). Some ways to do this were set out in the Commission’s Frontier Firms inquiry, including fostering innovation by connecting Māori organisations and businesses up to STEM, high-quality data, analytics, and technological advancements; or building innovative and transparent business practices by learning from the collective and intergenerational accountability models practised by Māori organisations (New Zealand Productivity Commission, 2021).
  • Land and the limitations on its use under collective ownership models, including to enable access to finance, are a key concern expressed repeatedly by Māori.

The Māori-Crown relationship and the obligations Te Tiriti places on the Crown are central to effective and fair treatment of Māori as Aotearoa New Zealand works to address productivity challenges. Given the intergenerational impacts of colonisation and inequity, it is essential that the impacts of change are managed effectively and do not disproportionately affect Māori, compounding existing trauma and disparities. It is also essential that Māori are adequately resourced and enabled to play their part in this relationship.

The Commission has previously recognised the value-add provided by Māori firms and te ao Māori perspectives in business, noting that “Kaupapa Māori firms are distinctive for having long-term horizons and managing multiple stakeholders and objectives” (New Zealand Productivity Commission, 2021). As reported in the Frontier Firms inquiry, figures from Stats NZ showed that employment in Māori authorities and firms grew faster than in the wider economy – and that these organisations were also more likely to export, and had higher rates of innovation and R&D, than other New Zealand firms (New Zealand Productivity Commission, 2021). 

In addition, integration of Māori values – such as kaitiakitanga, kōtahitanga and whanaungatanga serve to differentiate Māori goods and services, and provide added brand value for Aotearoa New Zealand products overseas, aligning closely with growing consumer demand for products with strong environmental and social credentials (New Zealand Productivity Commission, 2021).

From our engagements and the feedback from Māori stakeholders, a greater emphasis on sustainability and long-term focus can also help firms and government take more innovative and comprehensive approaches to solving cross-cutting, enduring, and emerging productivity challenges.

Targeting effort will help Aotearoa New Zealand deal with approaching global challenges

Aotearoa New Zealand’s economy faces further challenge from transformative forces emerging globally. These forces – or global “megatrends” – may herald irreversible changes across society, the economy, and the New Zealand way of life both domestically and globally. Aotearoa New Zealand’s relatively lower levels of innovation and productivity mean it has less ability than other countries to absorb and recover from adverse shocks and trends, and limits its ability to proactively prepare for and respond to future challenges (New Zealand Productivity Commission, Forthcoming).

The global megatrends are likely to influence both the way that the determinants of Aotearoa New Zealand’s productivity play out and our overall future productivity trajectory. As these megatrends originate beyond Aotearoa New Zealand, we have limited influence over them, their magnitude, and the extent of their impacts on productivity.

However, the extent to which these megatrends and their likely impacts on productivity can be anticipated may make a significant difference to Aotearoa New Zealand’s prospects, by enabling the country to make choices now about how to prepare or respond to what is approaching. 

In our assessment, six global megatrends are likely to significantly impact Aotearoa New Zealand’s productivity, as set out below. These have been drawn from a variety of sources including international organisations, strategic analysis by public agencies in New Zealand, forward-looking analysis by international and domestic think tanks, and research by private consultancies (Centre for Strategic Futures, 2021; CSIRO, 2017; European Strategy and Policy Analysis System, 2015; Inland Revenue, 2023; KPMG International, 2014; Ministry of Defence, 2021; Ministry of Foreign Affairs and Trade, 2023; OECD, 2021a; PWC, 2022; Retief et al., 2016; UN Environment Programme, 2012; United Nations, 2020; World Economic Forum, 2023). 

These megatrends are all approaching now, and each will influence and be influenced by the other trends and broader changes occurring across society and the economy. This means that there is a high level of uncertainty about how they will be experienced, the level of risk that they present to Aotearoa New Zealand’s productivity, and the speed and significance of their anticipated impacts.

Changing climate and the environment

Significant climate and environmental changes will lead to global disruption such as loss of homes, habitats, and productive capacity, as well as scarcity of critical, life-sustaining resources. 

Aotearoa New Zealand is already seeing the impact that increasing severe weather events are having on people, communities, infrastructure, land and property – reducing the productive capacity of businesses and individuals. In the context of an economy that is strongly tilted towards the primary sector, these challenges are likely to become wider and more systemic in the future for Aotearoa New Zealand, including issues such as food and water insecurity, natural ecosystem vulnerabilities, soil health, and climate (mal)adaptation – particularly. As supply chains, shipping, and global modes of transport are increasingly affected, there will also be impacts on Aotearoa New Zealand’s ability to import and export.

These climate challenges will require Aotearoa New Zealand to develop new approaches and ways of operating in the face of increasing constraints on, and depletion of, natural resources (for example, forest, fresh water, energy, and minerals) and disruption. A more productive economy, with a strong focus on innovation and diffusion, will be better positioned to develop and implement these approaches. For instance, the Commission’s forthcoming inquiry into improving economic resilience recommends changes to policies and institutional settings that can enhance the capability of firms, industries and communities to anticipate, prepare for and respond to disruptions and slow-moving shocks like climate change (New Zealand Productivity Commission, Forthcoming).

Technological innovation

The speed of technological change and innovation will present huge opportunities – consistent with the role of innovation and diffusion as a key enabler in driving productivity growth. Areas of innovation could include manufacturing innovation, the acquisition and use of data, rapid progression of artificial intelligence, and the impact of transnational connections and networks. However, unless carefully managed these shifts will come with costs for individuals, businesses and states. Benefits may go unrealised or be unevenly distributed, and there may be negative impacts on inclusivity and social cohesion. 

Slow adoption, or low levels of uptake, of technological advancements may limit Aotearoa New Zealand’s productivity potential and could mean we are left further behind. Opportunities may exist from taking a whole-of-government approach to this challenge – for example, to ensure regulatory settings appropriately balance risk and opportunity, and/or to smooth the costs of transition for businesses and individuals.

Complex geopolitics

Shifting institutional, cultural and economic alliances and systems will drive a rebalancing of international power relations, and potentially increased conflict, in the face of overall challenges to the role and power of state actors and non-state actors. Governments including in Aotearoa New Zealand will grapple with dilemmas surrounding the regulation of technology, the meeting of global emissions commitments, competition over significant marine routes and disputed territories, and global governance challenges relating to Antarctica and outer space, while continuing to consider the rights of indigenous peoples, post-colonial changes and constitutional evolution. 

All these issues may cause disruption to existing trade and diplomatic relationships, supply chains and our overall economic resilience – which is the focus of the Commission’s forthcoming final inquiry report (New Zealand Productivity Commission, forthcoming 2024). Improved productivity, including strong institutions, can support Aotearoa New Zealand to be better positioned to respond to this disruption.

Demographic change

Aotearoa New Zealand, like many other countries, faces an ageing workforce, which will place increasing pressure on its ability to meet skill and labour needs and provide for the welfare of the population. The level of impact will depend on the uncertain outcomes of migration and movement of peoples. This directly links to the role of investment in human capability to drive productivity growth.

Particularly as the impacts of climate change play out, migration and the movement of people will reshape communities globally and domestically, further reinforcing the trend of complex geopolitics. Alongside this, transition to a “care-centric economy” to support our ageing population will demand a workforce evolution. Additionally, increasing population diversity will likely create a need to build a robust societal framework for integrating te ao Māori and multiculturalism in Aotearoa New Zealand (Ministry of Social Development, 2021; New Zealand Treasury, 2022).

Social cohesion in a changing world

Global trends of increasing polarisation, distrust and conflict across society are also being seen within Aotearoa New Zealand (Koi Tū: The Centre for Informed Futures, 2023). 

Globally, income and wealth inequality has risen in many OECD countries in recent decades (CSIRO, 2017), stoking social discontent. An increasingly unequal society can weaken trust in public institutions and undermine democratic governance (Qureshi, 2023). 

In Aotearoa New Zealand, trust in institutions is declining and there is increasing risk of disinformation as well as polarisation (OECD, 2022a). This is reinforced by a range of inequities across society – such as child poverty and inequitable outcomes from education and healthcare investment. As noted in our recent inquiry A Fair Chance for All (New Zealand Productivity Commission, 2023a), the cycle of persistent disadvantage faced by too many New Zealanders risks eroding the social contract. 

As discussed earlier, from a productivity standpoint, social cohesion and institutional trust are necessary conditions for a functioning society and economy in which individuals and businesses can trust the ways they engage and transact with each other. This reinforces the importance of a focus on human capability and strong institutions across efforts to grow productivity – and the importance of equitable distribution of productivity gains across society.

Public health

There will be increasing pressure on the public health system resulting from demographic changes, shifting disease patterns and health threats that transcend national boundaries, which will require active management to ensure Aotearoa New Zealand remains able to meet its skills and labour needs from within the population. This megatrend therefore significantly links to the role of human capability in supporting productivity performance.

The experience of the COVID-19 pandemic is yet to be fully understood, but initial evidence suggests that lingering economic consequences will likely result, not only from the actions taken to manage spread but also from the long-term health effects experienced by some people as a result of contracting the virus (Northern Trust, 2023; Voruz et al., 2023). For Aotearoa New Zealand, the mental wellbeing of young New Zealanders is a significant concern, which had deteriorated even in the decade before the pandemic (Stats NZ, 2022). Intergenerational disadvantage caused by factors such as poor parental mental health and socioeconomic disparities can lead to longer-term impacts on student achievement and future labour productivity (Low et al., 2021). Aotearoa New Zealand will also face additional pressures on its health system given an ageing population and increasing climate change.

Long-term thinking is fundamental for productivity

A significant message emerging from the evidence, literature and domestic and international thinking relates to the long-term, intergenerational nature of productivity and productivity performance. Overall, taking a long-term and intergenerational approach is clearly fundamental to leveraging improved productivity across the range of factors that influence Aotearoa New Zealand’s productivity performance. 

By combining a clear focus on the key drivers of productivity with an approach that looks to the long term, there is potential to enable significant improvements across Aotearoa New Zealand’s productivity performance for New Zealanders now and in the future. This then enables the benefits from productivity to be shared equitably across the population to benefit all citizens.

The section that follows complements our analysis of the literature with themes raised through stakeholder engagement. 

[2] New Zealand Productivity Commission calculations, based on the OECD Productivity Database.

[3] Gross fixed capital formation is a measure of acquisitions of new or existing fixed assets by businesses, government, and households. Fixed assets refer to the produced assets used in the production process, such as machinery, buildings and vehicles. 

[4] Capital intensity refers to the amount of fixed assets present in relation to other factors of production, especially labour.