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Working Smarter: Driving Productivity Growth Through Skills - TPRP 08/06

The contribution of skills to productivity is dependent on other productivity drivers

Skills contribute more to growth in open economies with sound institutions

Hanushek and Wößman (2007) also present evidence that the effect of educational quality on economic growth is greater in countries that are more open to international trade, and countries where property rights are more secure.

This highlights the connectedness between skills and the other drivers of productivity discussed in this series of papers.

For investments in skills to deliver the greatest benefits for productivity growth, New Zealand’s economy needs to encourage innovation and capital investment. Firms in open and competitive markets are more likely to utilise the available skills of their workforces to improve productivity.

Workers in flexible and efficient labour markets can more readily find information about employers’ skills demands and new opportunities to work smarter and earn more.

Internationalisation and skills

The importance of international connections to productivity is a theme running through all of the papers in this productivity series and skills is no exception. Greater globalisation and technological change are driving three particular trends of relevance to skills: increasing mobility of skilled labour, increasing returns to skills, and ongoing economic structural change.

Increasing competition for highly skilled people will lead to greater migration flows

First, future flows of skilled labour are likely to increase. Skill levels are rapidly increasing in developing economies, enabling them to compete not only on the basis of low labour costs, but also in high-value, high skilled industries. Competition for skilled workers is likely to increase as ageing populations and declining birth rates in many OECD countries create skill shortages, and as opportunities for high-skilled employment in developing countries also increase. New Zealand already has one of highest levels of diaspora in the OECD and moderate levels of immigration. These migration flows are likely to increase as skilled New Zealanders pursue opportunities abroad and immigrants arrive.

Information and communication technologies are enabling international trade in sectors (especially services) that were previously not exposed to international competition. Coupled with political change and expansion of international trading systems, this has allowed huge numbers of people in developing countries to join the international marketplace as both workers and consumers[2]. This creates new market opportunities and competitive challenges for workers and firms in New Zealand.

Returns to skills are increasing and people will need to continually upskill

Second, globalisation and the use of technology are increasing the returns to skills. This is more than simply the substitution of least-skilled human labour by technology. There continue to be limits to the degree to which technology can replace labour, especially in the rapidly growing lower-skilled services sector. As a result, many developed economies are seeing rising relative demand for well-paid skilled jobs and for low-paid least skilled jobs and falling relative demand for those jobs “in the middle”. This is because technology can substitute for human labour in (or can facilitate the outsourcing of it) jobs like craft manual jobs and book-keeping jobs that require precision and hence, were never the least-skilled jobs in the labour market. Maximising the opportunities for all people to develop their skills should be a priority from both a social equity and economic competitiveness.[3]

Firms and individuals need to adapt to structural changes and new markets

Third, we will see ongoing structural change in the economy, with some firms and sectors in New Zealand’s economy expanding as others decline. To integrate with global supply chains and develop new markets, firms will need to upskill their workforces in order to adapt their internal systems and processes, integrate new technologies, and enable effective communication and collaboration with people of other cultures and languages. Individuals will need to be more flexible and adaptable – learning new skills and able to move between firms and sectors. Managing the transition through structural change by enabling ongoing upskilling is, again, important for both social and economic objectives.


  • [2]Friedman (2005) estimates that between three and four billion people joined the global economy as the economies of Eastern Europe, Central Asia, China, India and Latin America opened up at the end of the 20th Century.
  • [3]This interface of social and economic development is discussed in a recent joint paper of the UK Treasury, German Ministry of Finance and Swedish Ministry of Finance: Social Bridges II: The Importance of Human Capital for Growth and Inclusion (March 2008)
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