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New Zealand's productivity performance has gained considerable attention in recent times, particularly compared with Australia's. Using a three-pronged approach, this paper seeks to shed new light on that relative performance. First, measures of labour productivity levels as opposed to growth rates are compared in order to provide insight into disparities in GDP per capita between the two countries. Secondly, the paper examines the puzzle of why measures of economy-wide labour productivity growth rates produced by the OECD differ from the estimates of productivity growth rates as captured in the domestically-produced official statistics on the so-called measured or market sectors in New Zealand and Australia. Thirdly, labour productivity growth rates are compared for the 12 common industries for which New Zealand and Australia compile official productivity estimates.

The economy-wide labour productivity levels gap between Australia and New Zealand started to open up in the late 1960s and widened in the 1970s. Between the early 1980s and mid-1990s the gap was broadly unchanged, before starting to widen again.

By the end of the 2000s, New Zealand's economy-wide labour productivity level was around 30 percent below that of Australia. There are some measurement differences that account for some of this gap but only a relatively small part of it.

For the whole economy, Australia's average annual labour productivity growth rate (1.7 percent) exceeded New Zealand's (1.4 percent) over the 1978 to 2008 period. Growth rates were similar up to the early-1990s with Australia then drawing away for several years before resuming a similar trend from the early 2000s.

In the comparable measured sectors of the two economies, New Zealand's average annual labour productivity growth (2.2 percent) exceeded Australia's (2.0 percent) over the 1978 to 2008 period. New Zealand's growth rate was generally higher from the late 1980s to the mid 1990s and was otherwise similar to Australia's.

The difference in the Australasian economy-wide and measured-sector labour productivity performances is the main puzzle we have investigated in this paper. The puzzle holds over the 1988 to 2008 period but the difference is sensitive to the time period chosen.

The choice of labour input series - hours worked or hours paid - appears to explain a modest part of the productivity puzzle. A larger part is explained by different methodologies that Statistics New Zealand (Statistics NZ) and the Australian Bureau of Statistics (ABS) use to measure the services from residential dwellings. The ABS includes an implicit adjustment for housing quality. The Statistics NZ approach, if applied to Australian data, would lower economy-wide labour productivity growth by approximately 0.15 percent per year over the period 1991 to 2008. We conclude that use of the same methodology in the two countries would act to reduce a significant portion of the gap in the economy-wide growth rates - perhaps by up to a half.

The three industries outside the measured sector that are dominated by government - Government administration and defence, Education, and Health - have slightly lower (unofficial) labour productivity growth in New Zealand over the period 1988-2008. However, if we focus on the period from the mid-1990s when the data are more robust, the New Zealand growth rate for these industries overtakes Australia's. Overall the evidence does not point to differences in these government-dominated industries explaining the puzzle.

‘Property and business services' is a large industry outside the measured sector whose (unofficial) labour productivity growth rate is negative in New Zealand and close to zero in Australia over the period 1988-2008. While some of this difference could reflect measurement problems, there is enough evidence (eg the official New Zealand measure of business services post-1996 confirms negative growth) to suggest that there is a real difference and that this contributes to explaining a significant part of the puzzle.

The New Zealand industry-level productivity dataset allows for robust growth comparisons with Australia at the industry level, including a growth-accounting decomposition that is currently unavailable for the non-measured industries.

We conclude that both economy-wide and measured-sector estimates of labour productivity growth are valid measures. They give different readings partly because of real differences that naturally arise owing to their different coverage of the economy, and partly because of measurement difficulties. We also note that the differences on both measures are sensitive to the time period chosen.

Over the period we examined most closely, 1988-2008, New Zealand's measured sector labour productivity growth was slightly ahead of Australia's corresponding sector but there was not a lot in it. On the other hand, Australia had faster labour productivity growth economy wide and this cannot all be dismissed as a statistical anomaly. The levels gap in economy-wide labour productivity decisively favours Australia and has remained roughly constant for the last 10 years at around 30 percent of the Australian level.

From a policy perspective our findings suggest that raising New Zealand's productivity growth remains its most important economic challenge: the levels gap is still large even after measurement issues are taken into account. While New Zealand measured-sector productivity growth has been at least on a par with Australia, it needs to be faster to close the large gap; and it is disappointing that the higher growth rate expected of an otherwise similar country coming from behind has not eventuated in New Zealand's case.

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