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

Changes in the composition of the workforce partially explain recent labour productivity performance

Another paper in this productivity series investigates the extent to which changes in the composition of the New Zealand workforce over time have influenced the country’s labour productivity growth.

Recent workforce composition changes have reduced the growth rate of “labour quality” and lowered labour productivity growth

Does Quality Matter in Labour Input? The Changing Pattern of Labour Composition in New Zealand (Szeto and McLoughlin, 2008) uses an index of labour input factoring in changes in the composition of the workforce including factors such as age and experience, gender, and qualifications. It finds that labour quality has increased since the 1980s, but increased more slowly in recent years as employment rates have risen, bringing in inexperienced workers.

Looking over the medium term, labour quality is likely to rise further:

Labour quality will continue to increase over the medium term

“Firstly, we will likely see a further increase in qualification levels of the workforce as older cohorts with lower average qualification levels continue to be replaced by younger cohorts with higher average qualification levels.

Secondly, we do not expect a dampening impact from a large increase in the quantity of lower-skilled labour input as may have occurred since 1999. …

Lastly, an ageing workforce may have a further positive impact in terms of increasing work experience. The baby-blip cohort (currently 15 to 24 years old) moves into older groups over the next decade, and the 40 to 49 year group continues to make up a large proportion of the population”

Szeto and McLoughlin (2008).

Migration and skills

Migration is a major influence on New Zealand’s skills supply

Nearly one quarter of New Zealand’s resident population were born overseas, including 37% of Aucklanders. Migrants therefore have a major impact on labour utilisation rates and total economic output. But what influence does immigration have on productivity?

Immigration can contribute to productivity in several ways:

  • Immigration of skilled workers can increase human capital levels, and/or offset human capital losses from emigration of skilled residents;
  • Immigration can affect capital flows and investment – as migrants bring investment capital with them, and as they send remittances back to their country of origin;
  • Migrants can enable firms to invest and adapt new technologies by overcoming shortages or lags in the supply of specialist skills;
  • Migrants can bring new ideas, technologies and processes that can be adapted and applied in New Zealand firms;
  • Migrants can help to establish new connections with international markets and supply chains that enable firms to invest and grow.
New Zealand attracts relatively highly qualified immigrants

Evidence on the relative skills and productivity of New Zealand immigrants is mixed. Immigrants have, on average, higher education and qualifications levels than New Zealand born people. The proportion of new migrants entering through the skilled migrant programme has risen, and the level of qualifications of migrants entering under the general skills category has increased.

The Adult Literacy and Life Skills (ALL) survey shows that recent immigrants have lower overall literacy (and slightly lower numeracy) than established immigrants and those born in New Zealand. The literacy gap is largely transitory and closes once migrants are established. In the OECD’s PISA study, 15 year-old first generation migrants’ mathematics achievement is almost identical to that of New Zealand‑born students. Of the 14 OECD economies with significant immigrant populations, this was the case only in New Zealand, Australia and Canada (OECD, 2007, Indicator A6).

but income data suggests immigrants take time to reach full productivity

Income data indicates that new migrants’ productivity (and hence their incomes) is generally lower than similarly-qualified New Zealand-born workers (Boyd, 2003). The initial income gap, and the speed with which it closes as migrants become established, varies with country or region of origin. This income gap may be due to several factors – including differences in the quality of education underlying the nominally equivalent qualifications of different countries, discrimination, difficulties adjusting to New Zealand firms’ culture and work practices, and the time required to adapt and develop their skills to work and life in New Zealand.

Figure 14: Immigration status and prose literacy in the Adult Literacy and Life Skills survey 2006
Figure 14: Immigration status and prose literacy in the Adult Literacy and Life Skills survey 2006.
Source: Satherley, Lawes and Sok

Immigrants’ direct contribution to GDP growth appears at present to be largely through increased labourutilisation rather than through increases in average labour quality that raise labour productivity.

Supporting immigrants’ integration into life and work in New Zealand could help to lift productivity

New Zealand’s immigration system attracts and admits relatively highly skilled people, and the overall architecture of the system is well-designed. Fine-tuning to target specific skills could help skills supply adjust more quickly to clear skills shortages. Public policy measures, and improvements in communities’ and firms’ ability to integrate migrants, could increase the contribution of migrants’ skills to productivity growth by helping migrants to fully utilise their skills in the New Zealand economy.

International students studying high-level qualifications are a source of skills, ideas and market connections

The growth of international education as an export market has brought large numbers of students to New Zealand. This offers a major strategic opportunity to increase the contribution of immigration to productivity. Strategies are being implemented to increase the proportion of international students studying for advanced qualifications, and to enable their subsequent immigration and/or the establishment of lasting connections with New Zealand. The long-term impact of this on is yet to be seen, but international students are a group with the kinds of skills most likely to contribute to knowledge transfer and market development.

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