7 Conclusions
Institutions affect the use firms make of human capital. They do so by influencing the resources that firms use and the innovations they undertake in their quest for greater productivity and thereby their need for human capital. Greater use of human capital can increase efficiency of resource use through improving labour productivity, which can lead to greater firm productivity. Human capital is also an important component of innovation and assists in the uptake of technology. Depending on whether or not institutions are efficiency enhancing in their nature, they will either lead firms to make full use of human capital or discourage firms from doing so.
Optimising the contribution of human capital to productivity requires a broad perspective on the institutions that can influence human capital formation and application. The most important institutions for economic growth are those underlying institutions that provide the broad environment for economic activity, especially those related to property rights and contract enforcement. These give firms the confidence to engage in production and exchange by reducing their uncertainty about whether they will receive the fruits of their economic activity. Such confidence provides a basis on which firms are willing to make long term investments, including investments in human capital.
Institutions that govern specific activities in the production and exchange of output will have impacts on economic activity that are more limited in scope, but still important. Where institutions lead to increased production and exchange they generate economic growth. Activity-specific institutions affect the efficiency of resource allocation within firms and transactions between firms. Institutions governing labour markets, financial markets and use of land and other natural resources will influence the extent to which firms can utilise these factors efficiently and innovatively. Institutions governing product markets and corporate governance will influence the pressures on firms to do so. Both the extent to which firms can utilise factors efficiently and innovatively and the pressure to do so will drive firm use of and investment in human capital.
Labour market institutions, particularly those related to job protection and collective bargaining, are likely to be significant in terms of their impact on the investment and use of human capital and on the levels of productivity achieved by firms. Their impact will depend on how the institutions affect the relationship between workers and employers and whether improvements they bring to the quality of labour’s input increase productivity more or less than the degree to which they increase the cost and inflexibility of labour. The characteristics of institutions that enhance productive relationships between firms and workers is worth further exploration.
Institutions governing other factors of production will also influence the use of human capital. Financial market institutions that improve confidence in the soundness of the financial market will enhance the availability of finance to firms. This supports investment in physical capital and complementary investments in human capital, leading to increases in labour productivity and thereby higher firm productivity. Property rights particular to the use of land and natural resources influence the use that firms make of such resources and, depending on the confidence that firms have of gaining the returns from investments in natural resources, they could either substitute investment in human or physical capital for investment in resources or they may make complementary investments. To achieve greatest economic growth, property rights and financial market institutions would allow for the greatest potential utilisation of these factors of production.
Institutions related to transactions between firms influence the pressures on firms to be productive and to undertake innovations. Product market institutions that create competitive markets place pressure on firms to be efficient and innovative to maintain or increase market share. Corporate governance arrangements provide a discipline on firm management to maximise profits. Both types of institutions provide incentives to invest in human capital where it contributes to efficiency and innovation.
All of these activity-specific institutions can affect firm decisions in areas outside their domain. By way of example, labour market institutions can influence firm decisions about the use of capital where the relative impact of labour market and financial market institutions result in capital being more flexible, available and/or cost effective than labour. When new institutions are introduced, they can have consequences in other areas that may be unintended and may undermine productivity. Before introducing new institutions, assessment needs to be made of the cross-market impact of institutional changes in one area for resource use in other areas.
7.1 New Zealand’s institutions: areas for further work
Overall, underlying institutions can be seen to have the most significant effect on economic growth because of the context that they provide for economic activity to flourish. In New Zealand, in many regards our underlying institutions provide an excellent environment for economic activity. One New Zealand institution that is the subject of ongoing public debate is the Treaty of Waitangi. The evolution of interpretations of the Treaty will have ongoing implications for economic growth given its bearing on property rights, resource use and social cohesion in New Zealand. Useful work could be undertaken to strengthen Maori social capability and governance (New Zealand Treasury 2001)and, among other things, align such work with the intended outcomes of the Treaty settlement process.
New Zealand’s activity-specific institutions are also generally sound. However, there are some areas where they might be given further attention. Labour market institutions and the contribution that they can make to increases in productivity through improved relationships between employers and workers is an area that could usefully be further explored. Assessment of the impact on economic growth of the Employment Relations Act and recent amendments on the Act would be useful, once the provisions have been in place for a length of time, e.g. five years. Useful work exploring the implications for economic growth of New Zealand’s financial market institutions and property rights over natural resources is already underway, although further consideration could be given to how institutions could be changed to unlock the productive potential of multiply owned Maori land. New Zealand’s corporate governance and product market institutions are generally very efficient. Further work is underway to further strengthen corporate governance institutions and to consider future tariff levels.
