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19 December 2011
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Productivity in New Zealand

December 2011

Weak productivity growth is often cited as a reason behind New Zealand’s economic performance being below its economic potential. In terms of average hours worked per annum, New Zealanders are some of the hardest workers in the OECD (12th out of 34 OECD member countries in 2010); however our productivity levels are lower than many other OECD countries, resulting in a reduced GDP per capita. What is productivity and productivity growth? According to Statistics New Zealand, Productivity is a measure of how efficient inputs (capital and labour) are used within the economy to produce outputs”. Productivity growth is an increase in the volume of goods and services produced within an economy with a fixed amount of inputs. Therefore, improving New Zealand’s productivity performance is an important factor behind any long-term rise in the standard of living.

Statistics New Zealand produces productivity figures for the measured sector. The measured sector contains approximately 80 percent of the total New Zealand economy. It excludes the government administration and defence, health and education sectors (along with the ownership of owner-occupied dwellings). The output of these service sectors is difficult to quantify, therefore they are excluded from official productivity figures.

There are different measures of productivity, including labour, capital and multi-factor productivity.

Labour productivity is a measure of labour input to total output. In the year ended March 2010, labour productivity increased 3.7 percent, as hours worked fell to a greater extent than output (-4.3 percent and -0.8 percent respectively). This was the highest annual growth in labour productivity since 2000.

Capital productivity in the year ended March 2010 fell by one percent. Capital productivity measures the ratio of output to the ratio of capital inputs. During the year, capital inputs rose by 0.2 percent, while output fell by 0.8 percent. The Savings Working Group in their final report commented that productivity in New Zealand is constrained by low levels of capital when compared with other OECD countries.

Multifactor productivity captures productivity changes that cannot be identified as being due to labour or capital productivity movements.

Examples of multifactor productivity include technological advances, improvements in knowledge, methods and processes. Any increase in multifactor productivity indicates that goods and services are being produced more efficiently (a higher level of output for the same levels of input). In the year ended March 2010, New Zealand’s multifactor productivity rose by 1.5 percent due to total inputs falling by a greater extent than total outputs (inputs fell by 2.3 percent).

New Zealand’s labour productivity is reasonably low compared with other OECD countries. The OECD in their publication OECD Compendium of Productivity Indicators 2008 estimated GDP per hour worked for each OECD country in 2006, and compared the results with that of the United States. Recognising that the figures are somewhat dated (and the difficulties in obtaining comparable figures between countries), New Zealand’s GDP per hour worked in 2006 was equivalent to 56 percent of that of the United States, and was also below the OECD average of 75 percent (Table 1). New Zealand’s result was similar to the productivity of Greece (62 percent), the Slovak Republic (50 percent), and Portugal (48 percent). Australia’s GDP per hour worked was equivalent to 83 percent of that of the United States.

Table 1. OECD estimates of labour productivity levels for 2006

Country GDP US$m (based on PPPs) Total hours worked (millions) GDP per hour worked, USD GDP per hour worked, USA=100
Australia 735,330 17,675 41.6 83
Greece 303,605 9,645 31.5 62
NEW ZEALAND 107,318 3,798 28.3 56
Portugal 220,514 9,060 24.3 48
Slovak Republic 94,797 3,729 25.4 50
United States 13,132,900 260,631 50.4 100
OECD 36,118,223 949,664 38.0 75

Source: OECD, OECD Compendium of Productivity Indicators 2008. Table 2. p.69.

The New Zealand Productivity Commission (which began operating in April 2011) notes that there are no easy answers to lift New Zealand’s productivity performance, as “…there are many influences, factors and causes of productivity growth”. Apart from those factors which a Government has little influence over, such as natural resources, size, and distance from global markets, the Commission believes that productivity can be enhanced by creating the right policy environment. This can be undertaken through “…laws, regulations, institutions and policy choices – for individuals, businesses and other organisations to make choices and decisions that support increased productivity”. As part of their role to increase productivity in New Zealand, the Commission has commenced operation with two inquiries that are looking into housing affordability and international freight transport services.

Sources: Savings Working Group. Saving New Zealand: Reducing Vulnerabilities and Barriers to Growth and Prosperity. Savings Working Group Final Report to the Minister of Finance. January 2011.

New Zealand Productivity Commission. How is productivity lifted?

Grant Cleland, Research Services Analyst

Disclaimer. Every effort has been made to ensure that the content of this briefing paper is accurate, but no guarantee of accuracy can be given.
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