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Baumol’s cost disease

The inability of some labour-intensive activities to substitute labour with technology (capital) over time causes costs in such activities to rise, relative to other activities. Where low-productivity-growth sectors compete for labour with high-productivity-growth sectors, wages in lower-productivity sectors may grow faster than the measured productivity in that sector.

Capacity utilisation

The level of production capacity that is being used to produce output at any given time. Capacity utilisation indicates the output produced with given resources, compared with the potential output that could be produced if capacity were fully used.

Capital deepening

An increase in capital intensity (as indicated by the capital–labour ratio) by increasing the amount of machinery, equipment, etc, for each worker. Firms or economies that are “capital shallow” have relatively little capital for their labour force to work with.

Capital inputs

The use or consumption of capital in the production of outputs. Capital inputs include, for example, land, buildings, vehicles, and computers. In growth accounting and productivity measurement, “capital” generally refers to traded physical (and some intangible) assets —the equipment and structures used to produce goods and services. These capital inputs are distinct from the capital in Treasury’s Living Standards Framework (The Treasury, 2021), which additionally provides for the following.

•    Natural capital: all “aspects of the natural environment that support life and human activity”.

•    Human capital: the “capabilities and capacities of people to engage in work, study, recreation, and social activities”.

•    Social capital: the “norms, rules and institutions that influence the way in which people live and work together and experience a sense of belonging”.

Capital–labour ratio

The ratio of capital employed to labour employed – a measure of capital intensity.

Capital services

The flow of services from the stock of past investments. For example, the capital services provided by an office building can include protection against rain, comfort, and storage services.

Commodity markets

Markets for buying, selling and trading raw materials or primary products.


The process of transforming business processes to accommodate digitised information and digital technologies.


The central unit of analysis, that is, the “thing” for which inputs, outputs – and therefore productivity – are being measured. It can refer to a firm, public sector agency (for example, a school or hospital), region or country.

Frontier firms

Firms at the top of the industry productivity distribution. The 90th percentile (the top 10% of firms) is typically used to define the frontier.

Goods-producing industries

The goods-producing sector includes the following industries: manufacturing; electricity, gas, water, and waste services; and construction.

Gross domestic income (GDI)

Economic activity based on all the income earned while engaged in producing all goods and services output (that is, income paid to generate gross domestic product, or GDP) in a specific time period. These are the returns to labour and capital such as wages, salaries and profits.

Gross domestic product (GDP)

Economic activity based on the market value of all finished goods and services produced within a country's borders in a specific time period. GDP is calculated either:

  • by adding all spending by those who participate in the economy (expenditure approach), estimating the total value of output and deducting the cost of intermediate goods that are consumed in the process (the output, or production approach); or by calculating the income earned by all the factors of production in an economy and subtracting taxes and depreciation (income approach).  

Gross national income (GNI)

Economic activity based on the sum of all income earned by residents of a country, regardless of where the activity occurs.

Growth cycle

A period defined between two peaks in economic growth. Peaks are determined using statistical techniques by Stats NZ and are chosen to represent high points in capacity utilisation of the economy. Productivity is best analysed as averaged over growth cycles, removing the effect of changes to capital asset utilisation, labour utilisation and labour quality, which vary cyclically. For more information, see Stats NZ, 2023.

Integrated Data Infrastructure (IDI)

Research database administered by Stats NZ holding linked administrative microdata about people and households relating to their education, income, migration status, justice interactions and health outcomes.


Industries are grouped by the Australian and New Zealand Standard Industrial Classification (ANZSIC). Examples of industries include agriculture, forestry, and fishing; construction; manufacturing; and retail trade.

Information and Communications Technology (ICT)

Equipment and systems that provide access to digital information through telecommunications infrastructure and devices, including the internet, wireless networks, smartphones, and communication channels (that is, instant messaging, voice over internet protocols (VoIP), video-conferencing, and social networking).


The direct and indirect factors involved in the production of outputs. Inputs can be organised into three broad categories: labour, capital and consumables (also called intermediates).

Intangible assets

Assets that are identifiable but are not physical, such as reputation and brand recognition, skills, market research and patents.


Connected to Māori philosophy and principles.

Labour force

The total working-age population (resident, non-institutionalised population of Aotearoa New Zealand aged 15 years and over) who are classified as “employed” (working) or “unemployed” (available to work).

Labour income share

The share of national income paid out in wages and salaries.

Labour inputs

The labour utilised in the production of outputs, both directly (for example, teachers, for school outputs) and indirectly (for example, administrative staff, who contribute to the functioning of an entity).

Labour participation

The total labour force expressed as a percentage of the working-age population.

Labour productivity

Average output per unit of labour input. Labour productivity represents the total volume of output (measured in GDP) produced per unit of labour (measured in terms of the number of hours worked, hours paid, or the number of workers), during a given reference period.

Labour utilisation

The sum of those in the labour force that are not unemployed (without a paid job but looking for work) or under-employed (in part-time employment but wanting to work more hours). As with unemployment, under-utilisation is a broad measure of spare capacity in the labour market.

Longitudinal Business Database (LBD)

Research database administered by Stats NZ, holding linked administrative microdata about businesses. Researchers use the LBD to evaluate policies and analyse business performance.

Market-provided services

Services that are provided at economically significant prices, usually to generate a profit.


Modern term for the combined knowledge of Māori living in Aotearoa

New Zealand, comprising the te ao Māori indigenous worldview of relationships between people and the natural world. Humans are not seen as superior

or external to the natural world but as existing within it. Natural flora and fauna are akin to humankind, and all phenomena dwell in an intricate web of relationships and interconnections, all living within “the woven universe”. The term encompasses language (te reo), education (mātauranga), traditional environmental knowledge (taonga tuku iho, mātauranga o te taiao), traditional knowledge of cultural practice, such as healing and medicines (rongoā), fishing (hī ika) and cultivation (mahinga kai).

Measured sector (MS-16)

The measured sector comprises the 16 industries included in Stats NZ’s standard productivity statistics from 1996 to 2011, covering all predominantly market industries. The measured sector covered 76.7% of Aotearoa New Zealand’s GDP in 2019.

Measurement error

The difference between a measured quantity and its true value. It includes random error (naturally occurring errors expected with any specific measurement) and systematic error (caused by a misspecification that affects all measurements).

Multi-factor productivity (MFP)

The change in output that cannot be attributed to changes in the level of labour or capital input. Measures of MFP capture factors such as advances in knowledge, improvements in management and production techniques, and mismeasurement. MFP is also known as total factor productivity.

MFP is widely interpreted as an indicator of technological change. In the short-to-medium term, MFP estimates are subject to data limitations and assumptions, such as variations in capacity utilisation, economies of scale and scope, reallocation effects of capital and labour, and measurement error.

National accounts

The aggregated indicators of measured economic activity in an economy, guided by the system of national accounts (SNA), which is the international standard for measures of economic activity, enabling consistency and comparisons across countries.

Nominal (GDP, GNI, wages etc)

Measurement that uses current prices and is not adjusted for inflation (compare with “real” GDP, etc).

Non-market provided services

Services that are supplied for free or below economically significant prices, typically by governments or non-profit organisations. The three industries with the highest share of non-market provision in Aotearoa New Zealand are healthcare and social assistance, education and training, and public administration and safety.


Goods and services produced by entities in an economy. Technically, volume is a combination of both quantity and quality, meaning that output measurement captures economic value.

Primary industries

Stats NZ defines the primary sector to include the following industries: agriculture; forestry; fishing; and mining. The primary sector does not include further processing of raw materials, such as farm products like raw milk and livestock (classified as food and beverage manufacturing), nor does it include moving goods to market (part of distribution services).


Productivity measures illustrate how well an entity uses resources (inputs) to produce goods and services (outputs). It is calculated as the ratio of the quantity of outputs produced to some measure of the quantity of inputs used.

Productivity frontier

The productivity level of an entity (or entities) that has the best possible production practices. The closer to the frontier, the higher an entity’s productivity.

Production possibility frontier (PPF)

A curve that illustrates the maximum possible output combinations of two products or services an economy can achieve if all resources are fully and efficiently utilised. The curve is used to demonstrate where, and in what products, an economy reaches its greatest level of productive efficiency. Other products can be imported for consumption via trade with other nations.

Purchasing power parity (PPP)

A metric used to compare economic productivity and standards of living between countries by using a common "basket of goods”.

Real (GDP, GNI, wages, etc)

In contrast to nominal value, the “real” value is the measure of value expressed in terms of constant dollar purchasing power. A price index, with the level fixed in a specified base year, is applied to adjust nominal values of a quantity (such as wages or total output produced) to obtain real values.


The process of resources (labour and capital) and market share shifting between firms or industries. Shifts from low- to high-productivity firms or industries are considered as “productive”.


Two consecutive quarters of negative gross domestic product (GDP) growth.


The quantity remaining after other things have been subtracted or allowed for. Growth accounting and econometric approaches to calculating MFP as a residual that is not explained by measured factors of production.

Services industries

Stats NZ defines the service sector as including the following industries.

  • From 1978: wholesale trade; retail trade; accommodation and food services; transport, postal, and warehousing; information media and telecommunications; and financial and insurance services.
  • From 1996: the industries above, plus rental, hiring and real estate services; professional, scientific, and technical services; administrative and support services; and other services.

Service industries now represent approximately two-thirds (65%) of the economy in 2020, compared with about half in the 1970s.

Terms of trade

The ratio of a country’s export prices and its import prices, indicating how many units of exports are required to purchase a single unit of imports. Measurements are often recorded as an index for economic monitoring.

Total factor productivity

See multi-factor productivity (MFP).

Tradeables/ non-tradeables

Tradeable industries are industries that produce goods and services that can be traded across regions and international borders and are exposed to international competition.

Non-tradeable industries are industries where output faces no international competition.



List of boxes

Box 1

Productivity measures reveal little about the distribution of material living standards


Box 2

A brief history of GDP – from war to cooperation


Box 3

Measuring labour input


Box 4

Innovation, research and development, and intangible capital


Box 5

Options for measuring environmental productivity


Box 6

What drives improvements in the productivity of nations?


Box 7

Research and development, and skills


Box 8

Types of Foreign Direct Investment (FDI)


Box 9

The Research and Development Tax Incentive


Box 10

Options for revising policy settings to better support workers



List of figures

Figure 1.1

The Treasury’s Living Standards Framework


Figure 1.2

He Ara Waiora


Figure 1.3

How productivity relates to current and future wellbeing


Figure 2.1

In the last decade and a half, positive terms of trade changes have increased incomes


Figure 2.2

Aotearoa New Zealand’s terms of trade


Figure 2.3

Some of the income gains have flowed abroad


Figure 2.4

A large portion of primary income flows are direct income


Figure 2.5

Gross vs Net National Income per capita, 2021


Figure 2.6

The drivers of material living standards


Figure 2.7

New Zealanders work longer hours and get less output per hour than most OECD countries


Figure 2.8

Intangible capital: Broad categories and types of investment


Figure 3.1

Aotearoa New Zealand’s productivity has lagged behind other developed countries


Figure 3.2

Productivity growth globally has slowed since the 1970s


Figure 3.3

Aotearoa New Zealand’s relative decline began in the mid-20th century


Figure 3.4

Aotearoa New Zealand’s growth has come from working more hours, rather than increased productivity



Figure 3.5

New Zealanders continue to work long hours


Figure 3.6

Aotearoa New Zealand’s employment rate has recovered strongly since the 1990s


Figure 3.7

Aotearoa New Zealand has long been a low-capital economy


Figure 3.8

Sources of growth have varied across economic cycles


Figure 3.9

Cyclical contributions to output growth


Figure 3.10

Most GDP growth since the 1980s has occurred in the services sector


Figure 3.11

Services industries present a mixed productivity picture


Figure 3.12

Labour productivity (annualised average growth), 2008–2022


Figure 3.13

Productivity in the public sector


Figure 3.14

Labour productivity (GDP per capita and GDP per hour worked), 2010–2021


Figure 3.15 Quarterly hours worked and employment (seasonally adjusted) 47
Figure 3.16 Output and labour input growth, 2008–2022 48
Figure 3.17 Labour productivity, 2008–2022 48
Figure 3.18 Labour productivity and hours worked during the COVID-19 pandemic 49
Figure 4.1

Aotearoa New Zealand has low investment in R&D

Figure 4.2

Aotearoa New Zealand’s innovation performance varies by industry

Figure 4.3

GFCF as a percentage of GDP

Figure 4.4

Employees in Aotearoa New Zealand work with less machinery and equipment

Figure 4.5

Aotearoa New Zealand has an underdeveloped equity market

Figure 4.6

Venture capital is low

Figure 4.7

Short-term interest rates

Figure 4.8

Disinvestment in environmental capital

Figure 4.9

Export intensity and population

Figure 4.10

The NZ dollar experiences wide swings relative to trading partners

Figure 4.11

Merchandise exports in Aotearoa New Zealand are heavily concentrated in food & beverages

Figure 4.12

Inward FDI has been falling, outward FDI is among the lowest in the OECD

Figure 4.13

Management capability has been low, especially people management capability

Figure 4.14

Tertiary qualifications levels are about average in the working-age population

Figure 4.15

Our emigrants are more likely to be highly educated

Figure 4.16

The quality of maths, science and reading literacy have been declining for some time

Figure 4.17

There are substantial inequalities in educational achievement across the curriculum

Figure 4.18

Aotearoa New Zealand has invested a similar share of GDP into infrastructure as other high-income countries, with a heavy weighting on telecommunications

Figure 4.19

Aotearoa New Zealand and Australia’s construction input costs relative to ten other high-income countries

Figure 4.20

Institutional quality

Figure 4.21

Trust in government

Figure 4.22

Product market regulation is generally good

Figure 4.23

Aotearoa New Zealand has a business-friendly environment

Figure 4.24

Aotearoa New Zealand has a high rate of firm birth and death

Figure 5.1

Six recommendations for implementing focused innovation policy



List of tables

Table 4.1

Firm dynamics


Table 5.1

Published Productivity Commission inquiries