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Productivity: NZ's Biggest Economic Problem

Productivity: New Zealand's Biggest Economic Problem

Writing in the Australian Financial Review recently, respected Australian economist Fred Argy noted that Australian living standards, measured by real net national disposable income per head, “have soared by about 16 percent or nearly A$8,000 (NZ$9,500) a person in just the past five years – a great leap forward unequalled in any similar period in recent history.”

Argy estimated that about 20% of the improvement was due to rises in the employment to population ratio (increased labour utilisation), 40% to productivity growth per worker, and 40 percent to gains in Australia’s terms of trade.

How does New Zealand compare? The answer is, not well.

In the last five years, estimated real net national disposable income per capita grew by only NZ$2,250, an increase of 8% or half the growth in Australia.

Moreover, indicative calculations suggest that most of this modest improvement was due to increased labour utilisation (perhaps two-thirds) and better terms of trade (perhaps one-third). The productivity contribution appears to be around zero at best.

These are striking figures which need further analysis, but they are grounded in official Statistics New Zealand data. They reinforce the picture of New Zealand’s productivity slump in recent years and the widening absolute income gap with Australia.

The most reliable evidence of New Zealand’s productivity performance is the data that Statistics New Zealand began publishing two years ago on what it calls the measured sector of the economy (essentially the business sector).

This series has recently been extended back to 1978 and growth cycles in the economy have been identified (to remove the effect of cyclical influences on productivity).

The data confirm that labour productivity growth rose markedly following the post-1984 economic reforms, from a low point of 1.4% per annum during the last of the Muldoon years.

In successive cycles it was 2.9% in 1985-90, 2.6% in 1990-97 and 3.5% in 1997-2000.

In the Cullen years 2000-2006, however, labour productivity growth in the measured sector has plummeted to the pre-reform rate of 1.4%.

Moreover, unofficial calculations for the Business Roundtable indicate that the rate may have been close to zero in the most recent year (to March 2007).

All this turns government arguments on their head.

The government came into office claiming that the reforms had failed to raise labour productivity, even though the best available study (in 1999) had reported a “productivity surge” after 1993, “aided by the effects of the labour market reforms of the early 1990s, among other things.”

On the basis of this wrong diagnosis, the government declared its aim was to lift productivity growth to raise living standards. In the 2002 budget Dr Cullen spoke of “a broad consensus” to raise New Zealand’s sustainable GDP growth rate “in the first instance to somewhere around the 4 percent mark if we are to see a long-term rise in our standard of living relative to the rest of the developed world.”

“He added, “There is far less consensus about the means to achieve that lift in performance.”

The last point is certainly correct. The Business Roundtable (and many others) argued that the government’s tax, spend and regulate policies would depress, not raise, productivity and economic growth. The evidence is now unmistakeably on their side.

Productivity is ultimately a product of a country’s overall institutions and policies. A Mexican migrant to the United States, for example, is on average five times more productive than one who stays at home, due largely to better government, more economic freedom, clearer property rights and greater adherence to the rule of law in the United States.

Research indicates that high taxes are an important reason for the sluggish productivity performance of European economies compared with the United States.

Ironically, the thrust of Professor Argy’s article was to argue that Australia’s labour productivity record has been “barely average” in recent years relative to comparable countries, partly because reform efforts slackened under the Howard government.

Yet relative to New Zealand, which has gone backward on reform, Australia is now a standout performer with economic growth touching 4%, nearly twice New Zealand’s current rate. Both major parties competing for office in this month’s election are promising ongoing tax cuts, and many firms are desperately seeking labour.

Unless the productivity-destroying policies of recent years are soon reversed, the exhortation ‘Go west, young man’ is likely to take on a whole new meaning for many New Zealanders.


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