5  Australia and New Zealand productivity (continued)

Figure 10 – Australia and New Zealand capital-labour ratios

Source: Calculated from ABS (2002) data.

There are several potential explanations for the difference in the evolution of capital-labour ratios between Australia and New Zealand.

The higher rate of capital accumulation per unit of labour input in Australia compared to New Zealand after 1993 may reflect differences in the industrial structure between the two economies. For example, the Australian economy has a larger mining and quarrying industry compared to New Zealand which, given the high degree of capital intensity in the mining and quarrying industry, may be a factor behind Australia’s higher rate of capital accumulation.

The IMF (2002) has suggested a high concentration of household wealth in housing assets and the small size of New Zealand’s domestic market as being additional reasons for New Zealand’s lower rate of capital accumulation compared to Australia. A high concentration of wealth in housing assets means there is less domestic savings to finance domestic investment.[13] New Zealand’s small domestic market makes it difficult to achieve internal economies of scale and hence reduces the opportunities for profitable investment.

A further explanation is the impact of changes in factor market regulation on firms’ incentive to source output growth from employing more labour versus investing more in physical capital. For example, the impact of welfare and labour market reform in New Zealand in the early 1990s may have resulted in firms employing more labour rather than investing more in physical capital in meeting output growth.

The relative price of labour to capital is a measure of the cost to firms of investing in more capital versus employing more labour. When the relative price of labour to capital increases, firms are likely to invest more in physical capital and employ less labour. Conversely, when the relative price of labour to capital decreases, firms will employ more labour and invest less in physical capital.

Figure 11 shows the ‘ABS’ equivalent’ New Zealand capital-labour ratio and the relative price of labour to capital. The price of labour (or implicit hourly wage) is calculated by dividing sole proprietors adjusted compensation of employees by the Törnqvist labour input index. Likewise, the price of capital (or implicit cost of capital) is calculated by dividing the sole proprietors adjusted operating surplus by the Törnqvist capital input series.

Figure 11 – New Zealand capital-labour ratio and the relative price of labour to capital

Figure 11 shows that over the period 1988 to 1992 the relative price of labour to capital increased. During this period New Zealand’s capital-labour ratio increased (ie, the New Zealand economy experienced capital “deepening”). Between 1992 and 1996 the relative price of labour to capital fell by 22%. This occurred shortly after the introduction of the Employment Contracts Act (1991) and welfare reform. Maloney and Savage (1996) have suggested that the ECA was at least in part responsible for lower real wage growth in New Zealand relative to Australia after 1991. Firms appear to have employed labour rather than capital during this period resulting in a decline in the capital-labour ratio between 1992 and 1996 (ie, New Zealand experienced capital “shallowing”). A similar phenomenon occurred in Australia between 1988 and 1993 where Australia experienced strong growth in the labour input (although the capital ratio did not decline as it did in New Zealand). Parham (1999) has pointed out that strong labour growth was associated with a decline in real wages.

Lower productivity (quality) workers finding employment in the 1990s is a further possible reason for relatively lower labour productivity growth. Maloney and Savage (1996), in comparing labour market outcomes between Australia and New Zealand, questioned whether

…recent labour market reforms slowed the gains in productivity made under earlier product market reforms? Or is this poor productivity performance only a temporary by-product of accelerated job growth in New Zealand, as lower skilled, less productive workers find employment during this rapid expansion? More time will have to elapse before we can make any assessments over the long term effects of changes in the industrial relations system on labour productivity.Maloney and Savage 1996:107

Because no quality adjustment has been made to the labour input, changes in labour quality will be reflected in multifactor productivity. It is not apparent from Figure 9 that there was any deceleration in multifactor productivity growth following the introduction of the Employment Contracts Act (1991) and welfare reform. However, this does not mean that lower productivity workers gaining employment had no impact of multifactor productivity growth because other factors, such as a general up-skilling of the existing workforce, may have had offsetting impacts. Hence, the affect of changes in labour market regulation and welfare reform on capital accumulation and labour productivity warrants further investigation.