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Why Productivity Growth is a Red Herring

Why Productivity Growth is a Red Herring: and Australia is the wrong parameter

Why do we insist on comparing ourselves with Australia? There are many small-population, high-income countries that provide far more realistic, ambitious, and achievable, parameters. When so much is at stake, why think small? Why not just aim to be the best?

The NZ Government has created a Taskforce to identify ways in which we can catch-up with Australia by 2025. Their first report, released on Monday, 30 November, identified productivity growth as a major input to bridging the gap.

This raises two questions. Why Australia? and why productivity growth?

We'll leave aside the question of "why Australia" to those who set up the task force apart from noting that there is no reason worth considering to restrict our thinking to our nearest neighbour. Using Australia as a parameter just holds us back from our true potential.

Targeting productivity growth appears to be the way out of our dilemma but the measure of productivity per hour worked is largely meaningless in an economy in which 70% of GDP comes from service industries.

In the OECD, only workers in Luxembourg and Iceland work more hours per capita but only Greece has lower output per hour worked. Australian workers produce a third more wealth than New Zealand workers for every hour worked. And so what?

We work the third highest number of hours per capita in the OECD and have the second lowest output per hour worked. Add to this the fact that 70% of our GDP is due to service industries. What's wrong? Is it us, or the measures we are using?

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Most work done in service organisations is unproductive simply because it creates no value for the customer. That is, there is an awful lot of work done that no-one wants to pay for. This is an organisational issue and needs to be dealt with by each organisation. It has little to do with policy.

To raise our standard of living, to increase our income levels and to close the gap with other members of the OECD we simply need to stop doing the things that add no customer value, the things no-one wants. The freed capacity can then be used for productive work.

Service organisations are productive when they create customer value. And value is defined by the customer. It really is that simple...

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