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Putting Productivity First - TPRP 08/01

New Zealand’s Productivity Challenge

New Zealand’s productivity performance has been relatively poor for decades

New Zealand is currently 22nd out of the 30 OECD countries in terms of GDP per hour worked (a basic measure of productivity), and also in GDP per capita (a basic measure of material welfare).[3] An hour worked in New Zealand produces approximately 30 per cent less output than an hour worked in Australia and around 45 per cent less than an hour worked in the USA. Lower levels of productivity have a clear impact on wages. The average wage in Australia is approximately one third higher than in New Zealand.

This is not a recent phenomenon; New Zealand's productivity performance has been an issue for some time (see Figure 1). Trend labour productivity performance over the last two decades has been approximately one to two per cent annually, but this performance has been insufficient to close the gap in productivity with the more advanced economies. However, New Zealand has achieved high levels of employment growth during recent times and while this has social and economic benefits, it has the effect of dampening average productivity as new employees tend to be less productive. The New Zealand Treasury Paper, New Zealand’s Productivity Performance, provides a more detailed discussion.

Figure 1 - Level of labour productivity (output per hour)
Figure 1 - Level of labour productivity (output per hour).

Source: The Conference Board and Groningen Growth and Development Centre, Total Economy Database, January 2008

Governments share a key role in improving productivity growth

Governments share a key role in responding to the challenge of improving productivity growth; they have a range of policy levers that can enable firms to increase productivity and standards of living. Governments can encourage firms to engage in entrepreneurial activity by removing barriers to entrepreneurship and allowing markets to signal new business opportunities and smarter ways of operating. Beyond this, governments can provide the stability, flexibility and support that individuals, firms and markets require in order to invest, in both skills and capital, to ensure those investments are put to the most productive use, and to innovate, identify new market opportunities and bear risk.

A changing world places an increased emphasis on productivity

While productivity improvements are desirable even in an unchanging world, the increasingly open global economy, rising environmental concerns and demographic changes present both opportunities and challenges for the New Zealand economy and place increased emphasis on the need to continually improve productivity.

Emerging economies are offering new market opportunities for New Zealand firms

Globalisation is set to continue as international flows of goods, services, finance and ideas continue to increase and as the production chain becomes increasingly integrated across countries. These trends offer opportunities to access growing demand in new markets, adopt cutting-edge technologies and specialise in areas of the economy where New Zealand is most efficient. Globalisation will also pose new challenges asdeveloping countries continue to move up the value chain,conducting more research and development (R&D), product development and supply-chain management. A more globalised world provides greater rewards for those who can increase productivity and increases the risks for those who fail to perform.

Globalisation is not new, but the speed of growth and the scale of impact of the Asian economies, most notably India and China, make this phase of globalisation unprecedented. The integration of China into the global economy adds hundreds of millions of increasingly skilled workers into the global labour force. This shift in the centre of economic gravity, away from Europe and towards Asia, has the potential to improve the position of New Zealand relative to key markets and to lessen the negative impact of economic geography. It will also increase competition as some domestic markets will become easier to supply from overseas, which puts a premium on building a competitive business environment. Differences in language, political systems, culture, values, history and size may act as barriers to economic integration and provide New Zealand firms with new challenges to overcome in accessing markets.

Innovative firms can help mitigate the risks of climate change while achieving economic growth

Environmental risks and opportunities are rising, from both global climate change and New Zealand’s reliance on natural resources, particularly freshwater and petroleum products. To be sustainable, future economic growth must be compatible with environmental objectives. The Stern Review estimates the economic costs of unabated climate change will be particularly severe;[4] action is required on a global scale to reduce global warming and to mitigate its economic effects. However, increased action and environmental concern create opportunities for innovative firms to capitalise on international demand for products with low environmental impact and make new technologies and modes of production profitable. As a country that is heavily reliant on natural resources for its continued prosperity, New Zealand faces a challenge in achieving both environmental and economic objectives.

Productivity growth will reduce the impact of increasing dependency ratios

Today, there are ten people of working age for every five people who are not of working age. In 2030, there will be fewer than eight people of working age for every five who are not.[5] Demographic changes and an aging population have the potential to reduce economic growth as those in work support a greater number of people out of the labour market. Productivity growth will lessen the impact of increasing dependency ratios. It is hoped that productivity will increase as falling labour utilisation rates lead to increased demand for capital as a substitute for labour, and the workforce skills profile improves as cohorts of more highly-skilled younger workers enter the labour market.

Notes

  • [3]Economic Policy Reforms: Going For Growth 2008, OECD.
  • [4]Stern Review on the Economics of Climate Change, 2006.
  • [5]Calculated from Statistics New Zealand estimates.
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