4  Comparative productivity at sector level (continued)

In many respects these are plausible findings. For example, we might expect New Zealand to be more specialised than the UK in food processing, and the relative strength of metal products within New Zealand manufacturing may partly reflect the disproportionate influence of the large aluminium producer Comalco. In Section 5 below we assess the contributions of relative physical capital-intensity and labour quality to the New Zealand leads in these six sectors. However, before doing so we need to discuss the uncertainties underlying estimates of this kind and assess the sensitivity of some results to alternative reasonable assumptions regarding such variables as PPP exchange rates and labour inputs.

With regard to New Zealand PPPs, there was a shortage of matching revenue and quantity data for some manufacturing sectors which prevented the calculation of unit value ratios (UVRs) even though UVRs were available for those sectors in the UK (Table 4). The sectors affected were wood and paper products, petroleum and chemicals and non-metallic mineral products.  Hence for these sectors we developed a sensitivity test based on the ratios of UVRs to expenditure PPPs for these same sectors in Australia, using estimates provided by GGDC. These ratios were then applied to the New Zealand expenditure PPPs used in our New Zealand-UK comparison. In two cases this led to a sharp increase in the estimated New Zealand ALP level relative to the UK - up from 59 to 75 in wood and paper products and 38 to 52 in petroleum and chemicals. However, in non-metallic mineral products relative ALP barely changed (down from 56 to 55). We conclude that in two of these three sectors the estimated size of the New Zealand ALP gap relative to the UK is highly sensitive to the type of PPP exchange rate which is used; however, the existence of a relatively large productivity gap in these sectors is not in doubt.

One industry where New Zealand-UK comparisons are particularly difficult to carry out is agriculture. Since previous comparisons have found ALP in New Zealand agriculture to be among the highest in world terms (Prasada Rao, 1993), it comes as a surprise to find that estimated ALP in New Zealand agriculture, forestry and fishing in 2002 is only 78% of the UK level (compared to 115% only five years earlier; see Table 6, Row 1). [5] The estimated agriculture PPP for New Zealand in 2002 seems high - NZ$2.65 to US$1.00 - but this represents an appropriate update from the much lower PPP that GGDC estimated for 1997 (NZ$1.56) since agricultural prices in New Zealand rose rapidly between 1997-2002 whereas in the US they declined for many products. [6] The main factor explaining the seeming rapid improvement in UK labour productivity compared to New Zealand turns out to be a reported decline in UK agricultural employment of 23% between 1997-2002 while real output rose by 7%.[7]  In New Zealand the equivalent changes over the same period were a 7% increase in labour input and a 4% increase in real output.[8]

However, further investigation suggests that the UK National Accounts employment total for agriculture may be a considerable under-estimate since annual surveys carried out by the UK Department for the Environment, Food and Rural Affairs (DEFRA) report total employment roughly 26% higher than the National Accounts total for 2002, and show a slower rate of decline in employment (down approximately 15% between 1997-2002).[9]  In view of these disparities in official information on UK agricultural employment, we report alternative estimates of relative ALP for this sector using DEFRA employment data which show New Zealand ahead at 133% of the UK level in 1997, then declining to near-parity in 2002 (Appendix Table A1, bottom row).  In view of the data uncertainties, both sets of estimates for this sector must be regarded as unsatisfactory.[10] (For purely illustrative purposes all estimates relating to agriculture in subsequent tables are based on UK National Accounts employment totals).

Apart from these problems specific to agriculture, our estimates are potentially sensitive to the choice of benchmark year due to different business cycle conditions in each country and underlying volatility in some sectoral data series. Figure 3 shows that in manufacturing New Zealand has a consistent lead on ALP in food processing from 1995-2003 while the UK retains a consistent lead in seven other manufacturing sectors over the same period. In service sectors New Zealand is ahead throughout 1995-2004 in accommodation and restaurants and cultural and recreational services while the UK lead remains intact in wholesale and retail. The UK is also well ahead over this period in utilities and construction, although the gap narrows in utilities from 1999 onwards.

This leaves three sectors - mining, transport and business services - where New Zealand recorded higher ALP than the UK in the mid-late 1990s but has subsequently fallen behind. Conversely, the NZ lead in communication services in our benchmark year (2002) has only developed in very recent years.

In nearly all the sectors where New Zealand consistently lags behind the UK on ALP, the implication of the recent UK-US-French-German comparative study is that New Zealand is even further behind the other four countries (see Appendix Table A4). For reasons pointed out in the notes to Table A4, as well as the different levels of sectoral disaggregation that are involved and problems of transitivity, caution is strongly advised in drawing inferences from reading across the two sets of results. However, there do appear to be some sectors where New Zealand may enjoy a productivity lead over other countries besides the UK, for example, in food processing and some branches of financial services relative to France and Germany. There do not appear to be any sectors where New Zealand is ahead of the US on ALP at this level of disaggregation.

Figure 3 - Average labour productivity in market sectors, New Zealand and UK, 1995-97, 1998-2000, 2001-2003 (Index numbers: UK=100, Three-year averages)

Notes:  Estimates are shown as three-year averages on a calendar year basis. 2002 benchmark estimates of average value added per hour worked have been extrapolated back to 1995 and forward to 2004 on the basis of movements in constant price value added and labour inputs in each country. See Appendix Table A1 for full time series. The second sector listed “Agriculture, forestry and fishing (Defra emp)” shows how New Zealand compares against the UK in this sector when alternative UK employment figures provided by the Department of Environment, Food and Rural Affairs (Defra) are used; see main text for details.