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4.3  Economy-wide productivity

The long-term projections assume economy-wide labour productivity grows at long run trend, assumed to be 1.5% per year in the main scenarios. Figure 4.3 shows how this assumption is based on an historical average. Estimation issues are discussed in New Zealand Treasury (2008) which finds, based on data from 1988 to 2007, that the trend rate has been relatively steady between 1.3% and 1.5% over this period.

An economy's labour productivity is a function of its capital-to-labour ratio and total factor productivity. There is no assumption made in the LTFM about the economy's capital stock and therefore the projections are silent about the sources for the assumed labour productivity growth.

Of course, future productivity growth may differ from that observed in the past. Closing the income gap with Australia by 2025 would likely require labour productivity growth of around 3.3% per year. It is likely that significant structural change in the New Zealand economy would be required to achieve such rates.

There is also some literature on the effects of demographic change on productivity. Empirical evidence suggests that productivity rises with an individual's age before declining after middle age (see Productivity Commission, 2005 and Werding, 2007). However, in the absence of robust estimates for such an effect, this type of effect was not incorporated into the modelling.

Figure 4.3 - Economy-wide labour productivity growth
Figure 4.3 - Economy-wide labour productivity growth.
Source: The Treasury and OECD
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