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New Zealand's Productivity Performance - TPRP 08/02

International comparisons

To place New Zealand’s labour productivity performance in context, Figure 3 shows economy-wide labour productivity growth in New Zealand relative to Australia, Canada, and the United States. Once again, these are on an hours-worked basis and presented as moving averages (in this case, five years) to reduce fluctuations.

Productivity growth in New Zealand is below that of other nations over the long term, but a recent slowing is also evident in some other nations.

New Zealand’s annual labour productivity growth rate over the whole 36-year period averaged 1.1% per annum, below Australia (1.6%), Canada (1.5%), and the United States (1.7%). Using 5-year moving averages, New Zealand’s productivity growth was especially low in the late 1970s and very early 1980s. Following this, there were periods when productivity growth was above some of the comparators, including Australia. Nevertheless, from the early 1990s to the mid-2000s, New Zealand’s labour productivity growth was below that of Australia and generally below that of the other comparators.

 

Figure 3: Labour productivity growth (economy wide, 5-year average)
Figure 3: Labour productivity growth (economy wide, 5-year average).
Source: Source: OECD, The Treasury

New Zealand’s annual labour productivity growth (5-year moving average) slowed from almost 2% in 2003 to around 1% in 2006, the lowest among this group of comparators. However, Australia and Canada also experienced a slowing of labour productivity growth of a similar magnitude in recent years. This pattern is also evident in some OECD nations not shown in the graph (eg, Germany and Italy).

New Zealand’s lower per capita GDP reflects a lower level of productivity.

Figure 4 looks at the gap between the level of GDP per capita for OECD economies and the United States (in 2006) and decomposes the gap into labour utilisation (ie, hours worked per capita) and GDP per hour worked. The percentage point gap between New Zealand’s GDP per capita and that of the United States is around 41. This gap is essentially due to a gap in labour productivity. New Zealand ranks 22nd among the 30 OECD nations in terms of labour productivity and this matches the ranking on GDP per capita, despite having the fifth highest utilisation of labour in the OECD.

Figure 4: Decomposition of gap in GDP per capita related to the United States, 2006
Figure 4: Decomposition of gap in GDP per capita related to the United States, 2006.
Source: Source: OECD

Notes:

  1. Based on 2006 purchasing power parities (PPPs). For Luxembourg, the population is augmented by the number of cross-border workers to take account of their contribution to GDP. For Greece, data take into account a 10% upward revision to GDP as agreed to by Eurostat in October 2007.
  2. Labour resource utilisation is measured as total number of hours worked per capita.
  3. Labour productivity is measured as GDP per hour worked.
The lower level of labour productivity in New Zealand is a long-term issue.

The relatively low level of labour productivity in New Zealand has been an issue for some time. Using estimates from the Conference Board (2008), the level of labour productivity was fairly steady from the mid-1960s through until the early 1980s (Figure 5). Labour productivity growth has picked up since then but has not been enough to close the gap with these comparator nations or the OECD average. Using the Conference Board (2008) data, New Zealand’s ranking of 22nd in the OECD in terms of level of labour productivity has been constant since the 1980s.

Figure 5: Long-term labour productivity levels
Figure 5: Long-term labour productivity levels.
Source: The Conference Board and Groningen Growth and Development Centre (2008)

Note: OECD unweighted average is an estimate of 24 nations in the OECD with data available from 1960

Measured sector productivity performance

Official productivity data cover the measured sector of the New Zealand economy.

In New Zealand, as in many nations, productivity measurement issues are important. As discussed in Section 2 above, one element of measurement is that some industries do not have independent measures of both inputs and outputs. New Zealand now has official productivity statistics for the measured sector (see Box 1), which is the focus of this section.

Labour productivity growth in the measured sector averaged 2.0% per annum from 1978 to 2007.

Output growth in the measured sector averaged 2.6% per annum from 1978 to 2007. The main driver of this output growth was labour productivity growth of 2.0% per annum. Growth in labour input in the measured sector averaged 0.6% per annum. This is quite a slow growth rate and reflects large falls in the late 1980s and early 1990s and the exclusion of growth in labour input outside of the measured sector.

Productivity growth can be volatile from year to year so should be examined over the course of a cycle.

As with the economy-wide measure, productivity growth in the measured sector varies considerably from year to year. Changes in input utilisation arising from business cycle fluctuations are reflected in observed productivity. For example, although firms may reduce staff numbers during downturns, workers who are retained are often under-utilised. Under-utilisation of the capital stock also tends to be greater because the capital stock cannot be adjusted as easily as labour. In addition, there may be reallocation of activity with different productivity growth rates between or within industries during a business cycle. For these reasons, changes in productivity are analysed across growth cycles as estimated by SNZ (see Box 1).

Table 1:Output, input, and productivity growth across growth cycles[8]
Cycles (March years) Output
(A)
Labour input
(B)
Labour productivity
(A) – (B)
Capital input
(C)
Capital productivity
(A) – (C)
Multifactor productivity*
1978-2007 2.6% 0.6% 2.0% 3.4% -0.7% 0.9%
1978-1982 2.1% 0.4% 1.7% 1.7% 0.4% 1.2%
1982-1985 3.4% 2.0% 1.4% 6.8% -3.2% -0.5%
1985-1990 0.7% -2.1% 2.9% 4.9% -4.0% 0.2%
1990-1997 3.3% 0.8% 2.5% 2.0% 1.2% 2.0%
1997-2000 2.9% 0.1% 2.8% 2.4% 0.5% 1.9%
2000-latest 3.3% 2.2% 1.1% 3.8% -0.5% 0.4%
* Growth in MFP is a weighed average of growth in labour and capital productivity

Percentage changes are geometric annual growth rates calculated on unrounded index numbers; numbers may not add to total due torounding; 2000-latest is an incomplete cycle

Source: Productivity Statistics 1978-2007, Statistics New Zealand

Table 1 sets out growth in output, labour input, labour productivity, capital input, capital productivity and MFP across the SNZ growth cycles. As noted in Box 1, the definition of the measured sector changes from 1996 onwards. This means the full period averages are not on a consistent basis and the pre- and post-1996 cycles are not directly comparable.

Productivity growth appears to have slowed in recent years.

SNZ estimates of trend annual labour productivity growth vary from 1.4% from 1982 to 1985 to 2.9% from 1985 to 1990 (Figure 6). Although the period since 2000 is not a full cycle, labour productivity growth averaged 1.1% per annum and MFP growth averaged 0.4% per annum from 2000 to 2007. These rates of growth are below those recorded in the last full cycle (1997-2000).

Figure 6: Labour productivity growth, actual and trend, measured sector (March years 1978-2007)
Figure 6: Labour productivity growth, actual and trend, measured sector (March years 1978-2007).

Source: Productivity Statistics 1978-2007, Statistics New Zealand

Note: The period from 2000 is an incomplete productivity growth cycle

Figure 7 sets out the so-called “growth accounting” approach, which shows the relationships between inputs, productivity and output.

Figure 7: Growth accounting approach
Figure 7: Growth accounting approach.

Table 2 sets out the contributions to output growth and labour productivity growth. Output growth of 2.6% from 1978 to 2007 can be “accounted for” by contributions from capital (1.4%), MFP (0.9%) and labour (0.3%). Alternatively, labour productivity growth of 2.0% per annum from 1978 to 2007 can be “accounted for” by 0.9 percentage points from growth in MFP and 1.1 percentage points from a rise in the capital-to-labour ratio (ie, capital deepening). Comparing the incomplete cycle since 2000 with the whole period, growth in both labour and capital inputs was above average and led to output growth of 3.3%. However, labour productivity growth was lower due to subdued MFP growth and less capital deepening.

Table 2: Contributions to output growth and labour productivity growth across growth cycles*
Cycles
(March years)

Labour
Contribution
(A)

Capital contribution
(B)

Multifactor
productivity
contribution
(C)

Output
(A)+(B)+(C)

Capital deepening
contribution
(D)

Labour
productivity
(C)+(D)

1978-2007 0.3% 1.4% 0.9% 2.6% 1.1% 2.0%
1978-1982 0.3% 0.7% 1.2% 2.1% 0.5% 1.7%
1982-1985 1.2% 2.7% -0.5% 3.4% 1.8% 1.4%
1985-1990 -1.4% 1.9% 0.2% 0.7% 2.7% 2.9%
1990-1997 0.5% 0.8% 2.0% 3.3% 0.4% 2.5%
1997-2000 0.1% 0.9% 1.9% 2.9% 0.8% 2.8%
2000-latest 1.2% 1.6% 0.4% 3.3% 0.7% 1.1%

* The contributions of labour and capital to output growth are essentially the growth in the inputweighted by the share of the input in total factor income. MFP growth contributes directly to outputgrowth and is not weighted.

Percentage changes are geometric annual growth rates calculated on unrounded index numbers; numbers may not add to total due torounding; 2000-latest is an incomplete cycle

Source: Productivity Statistics 1978-2007, Statistics New Zealand

Notes

  • [8]Capital productivity is output per unit of capital, and like labour productivity it is a partial measure. However, in general we are more interested in investing in capital to raise the productivity of each person working rather than adding more people to raise the productivity of each machine or other piece of capital. Put another way, a high figure for capital productivity can reflect efficient use of capital or low investment. This ambiguity makes capital productivity a less useful partial measure than labour productivity.
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