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6 Conclusions

Statistics NZ has published official productivity statistics for the measured sector of the New Zealand economy since 2006, with the current version of the measured sector covering around 74 percent of GDP. Use of the same industrial classification system, as well as similar, internationally-accepted methodologies for measuring productivity, allows official New Zealand and Australian productivity data to be compared across 12 broad industries. These industries account for just over 60 percent of each economy.

The OECD publishes economy-wide productivity statistics for all its member countries. Both Australia's and New Zealand's economy-wide labour productivity growth performances are lower than their official measured-sector performances, and this is especially so in New Zealand. Our main conclusions about labour productivity levels and the different outcomes across the four labour productivity growth series and how we explain them are laid out below.

The economy-wide labour productivity levels gap between Australia and New Zealand started to open up in the late 1960s (ie before the start of the any of the series referenced in this paper) and widened in the 1970s. Between the early 1980s and mid-1990s the gap was broadly unchanged, before starting to widen again (figure 2).

By the end of the 2000s, New Zealand's economy-wide labour productivity level was around 30 percent below that of Australia (figure 2). There are some measurement differences (eg with regard to FISIM and OOD) that account for some of this gap but only a relatively small part.

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 (figure 3).

In the measured sector, 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 (figure 4).

The differences in the Australian and New Zealand 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 - for which we have (unofficial) industry data to help explain it. However, the differences are sensitive to the time period chosen. For example, over the period 1996 to 2008 both Australia's economy-wide and measured-sector labour productivity growth rates exceed those of New Zealand. From 2001 to 2008, New Zealand was ahead in economy-wide labour productivity growth but behind in the measured sector.

The choice of labour input appears to explain a part of the productivity puzzle. For example, over the period 1988-2008, use of HLFS hours worked for measured-sector labour input in New Zealand reduces measured-sector labour productivity growth from 2.4 percent to 2.2 percent. This is the same as the Australian growth rate and so removes a part of the puzzle, at least over this particular time period.

The allocation of the appropriate proportion of FISIM to final consumption would lift New Zealand's GDP level by around 1 percent to 2 percent. The effect on productivity growth will depend on the actual allocations but is likely to be small.

In the case of residential dwellings, Statistics NZ and the ABS use different methodologies with regard to housing quality and this contributes to the puzzle. 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 any significant part of the puzzle, however there are known issues surrounding the robustness of the output data for parts of these industries.

‘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 also contributes to explaining a significant part of the puzzle. It would be useful to understand better the reasons for the poor performance in this industry.

The new 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. Further comparative analysis at the industry level is likely to yield further insights and understanding.

Overall, both economy-wide and measured-sector measures of labour productivity growth are valid measures. They give different readings; this is partly because of real differences relating to their different coverage of the economy and partly because of measurement difficulties. They are also sensitive to the time period chosen.

Over the period we examined most closely, 1988-2008, New Zealand's measured-sector growth was slightly ahead of Australia's corresponding sector but there was not a lot in it. On the other hand, Australia had faster 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.

What does this all mean for policy? We would say 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.

A further perspective is that Australia has had higher labour input growth and has managed to deploy a greater proportion of it to the measured sector that generally has had faster productivity growth. In fact New Zealand's measured sector saw particularly slow growth in its labour input. One hypothesis for further investigation is that the New Zealand economy was less successful in allocating labour to industries with higher productivity growth than the Australian economy. This could have been due to fewer opportunities, greater rigidities, or greater imbalances.

Finally, we recognise that this paper has not looked at the trans-Tasman breakdown of labour productivity into multifactor productivity and capital deepening. This will require tackling a number of difficult issues connected with the measurement of capital inputs. This is an important topic for further investigation and analysis.

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