5  Relative physical capital-intensity and labour quality at sector level

5.1  Capital stocks and capital-labour ratios

In Section 2.2 above we outlined the perpetual inventory method of estimating capital stocks that cumulates constant price investments and deducts the value of depreciated assets. If we assume that depreciation rates are geometric, this has the advantage that they are easy to implement, in particular, if long time series of investments are not available but it is possible to make reasonable estimates of starting stocks. The disadvantage of this assumption is that assets are depreciated rapidly at the beginning of the asset’s life but depreciation then tails off subsequently. This assumption is more reasonable for assets where technological change is rapid than it is for assets such as structures.

In order to derive comparable estimates of net capital stocks in New Zealand and the UK, common sector-specific depreciation rates were applied to National Accounts investment data in each country. This approach follows O’Mahony (1993, 1999) who has shown that cross-country comparisons of official capital stocks figures are sensitive to differences in measurement techniques used by national statistical offices. Five asset types were distinguished: structures (non-residential buildings and other construction), computers, other plant and machinery, vehicles and intangibles (defined in the UK as consisting of patents, mineral exploration, artistic originals and the value of computer software). Investment data in national currencies were converted to US$ using OECD PPPs for investment goods by asset type.  Finally, starting values for capital stocks were required in order to implement the perpetual inventory formula. In the UK starting values were set in 1948 by raising investment for that year by a factor equal to 0.5* (1/d_j) where d_j denotes the depreciation rate for asset type j. [11] In New Zealand the starting year for applying this formula ranged from 1859 for buildings to 1964 for computers.

Across market sectors as a whole, average physical capital per hour worked in New Zealand is estimated at 69% of the UK level in 2002, down from 78% in 1995. This is broadly consistent with estimates at aggregate economy level reported by Schreyer (2006). As shown in Figure 4, in 14 of the 21 sectors New Zealand capital-intensity was relatively low compared to the UK throughout the 1995-2004 period: agriculture, forestry and fishing, mining, food processing, printing and publishing, petroleum and chemicals, non-metallic mineral products, machinery and equipment, furniture and other manufacturing, retail, hotels and catering, transport and storage, finance and insurance, business services and cultural and recreational services.

However, in four sectors New Zealand recorded higher capital-intensity than the UK for at least part of this period: textiles and clothing, metal products, electricity, gas and water supply and wholesale trade. And in another three sectors relative physical capital per hour worked has been consistently higher in New Zealand throughout the period: communication services, construction and wood and paper products.

Given that the UK has on average invested much less in physical capital assets in recent decades than countries such as the US, France and Germany, it is important not to overstate the significance of New Zealand being more capital-intensive than the UK in certain sectors. Reading across from comparisons of the UK with the US, France and Germany (see Appendix Table A5) suggests that physical capital-intensity in communication services may be comparable with that in the US and France but physical capital per hour worked in construction and wood and paper products is still much lower in New Zealand than in the other three countries. Nonetheless, it is useful to be able to take account of sectoral variation in relative capital-intensity in New Zealand when seeking to evaluate the factors contributing to relatively weak overall productivity performance.    

Figure 4 - Average physical capital per hour worked in market sectors, New Zealand/ UK, 1995-97, 1998-2000, 2001-03 (Index numbers: UK=1.00, Three-year averages)

Notes:   Estimates are shown as three-year averages on a calendar year basis. Estimated productive capital stocks were initially supplied for New Zealand in constant price 1995-96 NZ$ and for the UK in 2002 constant price £ sterling. Both these series were converted to constant price 1999 US$ using 1999 OECD PPPs for non-ICT investment goods by asset type along with deflators based on movements in investment goods producer price indices in the UK, US and New Zealand. For computers and software (assumed to be representative of intangibles), US ICT capital stock deflators were used, obtained from http://www.csls.ca/data/ict.asp. Full time series shown in Appendix Table A2.