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Employment, productivity and wage growth

Rising employment since the early 1990s has helped to raise the incomes of the majority of New Zealanders. For those already in the workforce, incomes have risen alongside growth. For those who had been out of the workforce, new employment opportunities have brought with them rising incomes from paid employment. The chart below shows the broadest measure of wage growth adjusted for inflation. It illustrates significant wage growth since 1996, averaging 1.9% per annum. These wage changes have broadly mirrored movements in productivity.

Figure 4: Productivity and real wages
Figure 4: Productivity and real wages.
Source: Statistics New Zealand

These trends also show up in recent Treasury research into the distribution of income. Since the late 1990s there have been steady increases in inflation-adjusted incomes, across the income distribution, for working-age individuals. For those on lower incomes this is largely because of increasing employment levels, whereas wage increases have contributed more to increasing incomes for people on higher incomes. Household incomes have also experienced similar increases, although households with lower employment rates have experienced weaker real income increases over the period.

Current growth rates are the result of a range of factors

New Zealand’s potential to sustain and raise growth rates over the next decade reflects private endeavour and the hard-won impacts of the policies of successive governments. These have fundamentally improved the New Zealand economy.

The marked increase in the flexibility of the economy over the past two decades has manifested itself in all parts of the economy: the labour market, financial markets and the provision of goods and services. The result has been a much more dynamic economy able to respond to shifts in markets and manage significant economic shocks.

One of the most significant factors underpinning New Zealand’s economic growth has been a generally sound and sustainable macroeconomic framework. This has led to a marked reduction in economic volatility, allowing households and businesses to plan with greater certainty. There are still benefits to be gained as New Zealanders and overseas investors become increasingly confident that this stability will be an ongoing feature of the economic environment.

A marked increase in the efficiency of the state sector over the past 20 years has supported growth. There is a risk, however, that growing expenditure expectations will be hard to contain. There is also a need to rejuvenate government’s focus on ensuring the performance of the state sector.

Other factors affect growth

Wider factors will impinge on New Zealand’s growth prospects going forward. Four major developments will continue to dominate the strategic context for the New Zealand economy over the medium to longer term.

International economic and political developments

International conditions look generally favourable for New Zealand. The locus of global trade is shifting to China and East Asia, bringing markets closer to home. In addition, our major trading partner – Australia – has been one of the best performing in the OECD over the past decade and it will probably continue to be.

There are risks that the international environment could evolve in a more volatile and less favourable way because of factors such as:

  • geopolitical concerns around security, with risks of confidence shocks and subsequent higher ongoing costs of doing business
  • the low real interest rates of recent years that have spurred a very large build-up of household debt in developed countries (including New Zealand), increasing vulnerability to adverse shocks
  • current account positions across parts of the global economy that indicate risk of substantial real exchange rate alignments in coming years, and
  • weak fiscal positions in much of the developed world, which reduce the ability of fiscal policy to cushion shocks or to meet demographic changes and other pressures.

Globalisation

Our physical distance from the main global economies means that goods take longer to be transported to market, and person-to-person links are harder to develop. However, innovations in transportation and communications provide ways in which the distance factor can be overcome. Making the most of these shifts will require domestic industries to adapt to the consequent changes in global production systems.

The increased mobility of capital and labour will also raise the risks of New Zealand becoming more peripheral as a place to do business. This will make it harder to attract and retain financial and human resources. Moves towards greater international rule-making will raise opportunities and risks for New Zealand. As a small, external player we benefit from greater certainty around the rules of the game, but we have limited ability to influence these rules.

Demographic change

In the absence of significant policy shifts, the ageing of the population in many OECD countries will increase the dependency ratio over the longer term, reduce long-run growth, and increase the fiscal burden of publicly funded health and superannuation. New Zealand will also be affected by these trends, with the old-age dependency ratio likely to double between 2004 and 2050.

Risks faced by a resource-based economy

World-wide there has been a trend of declining real prices for purely resource-based products, and increasing returns to skills and knowledge-based goods and services. Recent rapid growth in China and India may have temporarily slowed the first of these factors. Nevertheless, New Zealand remains a predominantly resource-based economy, dependent on continually rising productivity in the primary sector.

Risks associated with being a resource-based economy arise through trading partners retaining high levels of agricultural protection, increased demands on the use of natural resources and increasing biosecurity risks. These negative factors may be offset by historically high terms of trade, increasing demand for protein and other agricultural products from rapidly growing economies in Asia, and continued high levels of productivity growth in primary industries.

Making sure the engine does not stall

In summary, the New Zealand economy has made impressive gains over the last decade, with flow-on effects for living standards. If New Zealand is to build on these gains, the economy will need to shift gears to focus on increasing labour productivity.

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