1  Introduction

Productivity performance is now central to economic policy debates in New Zealand due to public concern about the country’s decline relative to many other advanced industrial countries in measures of living standards such as average Gross Domestic Product (GDP) per head of population. For example, IMF (2002) noted that New Zealand’s real GDP growth since 1985 had been below the OECD average and that the gap between New Zealand and Australia in real GDP per capita widened throughout this period. Schreyer (2006, Table 1) shows that low GDP per capita in New Zealand is not attributable to lower levels of labour utilisation (as measured by average hours worked per capita) compared to Australia, or indeed several other countries. By contrast, there is a clear link between relatively low levels of GDP per capita and weak performance on labour productivity (average output per hour worked).

IMF (2002) estimate that in 1999 average labour productivity (ALP) in market sectors in New Zealand was only 73% of the Australian level, down from 82% in 1988. Around three quarters of the Australian-New Zealand ALP gap is attributed to a relatively low level of physical capital per unit of labour input in New Zealand with the remainder attributed to lower multi-factor productivity (MFP) which captures, among other things, differences in the efficiency with which existing capital and labour resources are utilised. Hall and Scobie (2005) confirm the gap in capital intensity between New Zealand and Australia which is associated with a much lower cost of labour relative to capital in New Zealand compared to Australia. At the aggregate economy level Schreyer (2006) estimates that New Zealand ALP in 2002 was roughly 76% of the Australian level, 69% of the UK level and 61% of the US level. He also finds average physical capital-intensity and MFP in New Zealand to be markedly lower than in Australia, the UK or the US.

To date most productivity levels comparisons involving New Zealand have been confined to the aggregate economy or to broadly-defined sectors such as manufacturing. In part this has reflected gaps in sector-level data and the difficulties involved in the choice of appropriate exchange rates for converting sectoral outputs in different countries to a common currency. However, highly aggregated comparisons potentially conceal marked disparities between different sectors in New Zealand in relative productivity performance. Hence, there is a strong motivation to carry out cross-country productivity comparisons at a more disaggregated sectoral level than hitherto.

In this paper we present the results of a New Zealand-UK comparison which distinguishes 21 different sectors within the ‘market economy’.[1] To achieve this we have drawn on a number of different data sources in the two countries, including customised data series prepared by Statistics New Zealand and a new set of sector-level purchasing power parity (PPP) exchange rate estimates for New Zealand prepared by the Groningen Growth and Development Centre (GGDC) at the University of Groningen in the Netherlands. Inevitably, our findings come with a number of caveats due to the inherent difficulties of comparing ‘like with like’ across countries. Therefore, the decisions we have taken in order to maximise data comparability across New Zealand and the UK are explained at some length in the main text and in an Appendix on Sources and Methods.

The paper is ordered as follows: Section 2 outlines our methodology, with particular reference to the choice of PPPs. Section 3 presents our benchmark estimates of comparative levels of ALP and MFP for total market sectors in New Zealand and the UK. Section 4 then presents our estimates of relative ALP levels at detailed sector level over the ten years from 1995-2004. Section 5 reports on cross-country differences in production inputs, focussing on capital stocks, capital-labour ratios and labour quality. Section 6 compares estimated MFP levels at sector level in the two countries over the same ten-year period and reports on the estimated contributions of physical and human capital inputs to cross-country differences in ALP. It then assesses recent trends in growth rates of output, labour input, ALP and MFP at sector level. Section 7 summarises the main findings of interest. Throughout the study we place New Zealand’s relative productivity performance in wider perspective by drawing on recent comparisons of the UK, US, France and Germany which have been carried out at the National Institute of Economic and Social Research (NIESR).