Productivity, Capital-Intensity and Labour Quality at Sector Level in New Zealand and the UK

New Zealand Treasury Working Paper 07/01

March 2007

Authors: Geoff Mason and Matthew Osborne

Abstract

Understanding productivity performance is important to informing policy advice on how to improve productivity and therefore New Zealand's overall economic performance. Given data limitations inherent in international productivity comparisons, this paper is not intended to inform policy in isolation but forms an important element of a wide and expanding body of evidence on the performance of the New Zealand economy. Previous international productivity comparisons involving New Zealand have been confined to the aggregate economy or to broadly-defined sectors such as manufacturing. This paper reports on a New Zealand-UK comparison which distinguishes 21 different ‘market sectors’ (ie, excluding public administration, education, health, property services and some personal, social and community services). It confirms the prevailing consensus that, in aggregate, New Zealand market sectors compare unfavourably with the UK on average labour productivity (ALP) - and by implication compare even more unfavourably with other countries such as the US. However, beneath this overall story there is considerable sectoral variation. While some NZ sectors out-perform the UK on ALP and/or multi-factor productivity (MFP), there is a large group of sectors which fall short of the UK on both productivity measures. Most of these low-productivity sectors are relatively low in physical capital-intensity compared to the UK. Overall, roughly a quarter of the New Zealand-UK gap in ALP for aggregate market sectors in 2002 was attributable to differences in employment structure such as the relatively high shares of New Zealand employment in comparatively low value added sectors such as agriculture. The remaining three quarters of the ALP gap were accounted for by within-sector productivity differences.

Acknowledgements

This project has been financially supported by NZ Treasury which is not however responsible for any views expressed in this paper. We are particularly grateful to Gerard Ypma at the Groningen Growth and Development Centre for preparation of purchasing power parity exchange rates and to Joel Cook, Antony Ede and Jodi York at Statistics NZ for preparation of customised data series. We would also like to thank Carl Bakker, Max Dupuy, Brian Easton, Kevin Fox, Melody Guy, Dean Hyslop and Dean Parham for comments on earlier drafts of this paper and our colleagues Mary O’Mahony, Kate Robinson and Brigid O’Leary for advice and support during the project. Responsibility for any errors is ours alone.

Disclaimer

The views, opinions, findings, and conclusions or recommendations expressed in this Working Paper are strictly those of the author(s). They do not necessarily reflect the views of the New Zealand Treasury. The Treasury takes no responsibility for any errors or omissions in, or for the correctness of, the information contained in these working papers. The paper is presented not as policy, but with a view to inform and stimulate wider debate.