The New Zealand Institute
| Grade | NZ Rank | Trend | Latest Value | 2015 Target | |
|---|---|---|---|---|---|
| D | 24th of 34 | Good | $49 per hour | $59 | Not improving fast enough |
Labour productivity measures the value of output produced per worker; usually either per year or per hour worked. Labour productivity is an important measure because when combined with the number of hours worked per capita, it determines GDP per capita (see Figure 2 of the GDP per capita measure). New Zealand performs in the middle of the OECD countries for annual hours worked per employee but is well behind in labour productivity. Higher labour productivity would directly lift economic prosperity.
Labour productivity can be raised by lifting the value of goods and services produced or by lifting efficiency to increase the volume of goods and services per hour worked.
A relatively simple way to think about how labour productivity can be improved in an economy is to focus on innovation, capital and talent. Innovation contributes by making changes that lift value, thereby increasing the price of goods and services or by improving efficiency and lifting output per hour. Increasing capital intensity contributes by providing the worker with more advanced equipment and other facilities so workers can make higher value outputs or make more per hour. Talent contributes by allowing managers and workers to make better choices about what to do, and by developing skills to work more effectively so workers can produce more per hour worked. There are opportunities to improve all three in New Zealand.
Increasing labour productivity and workforce participation is crucial to increasing the value of competitiveness of output, lifting New Zealand’s standard of living, and closing the income gap with Australia and other better performing competing countries.
From 1990 to 2010 labour productivity increased steadily in New Zealand. That may seem good news but, as Figure 1 shows the increase has been greater in other OECD countries, including Australia. So despite the improving trend, the higher rate of improvement in Australia and other OECD countries is resulting in a widening gap.
Figure 2 shows that New Zealand’s labour productivity is in the bottom third among OECD countries. Since 1990, New Zealand has not achieved a rank higher than 20th in the OECD. Luxembourg is the highest ranked OECD country with its workers producing $66 more per hour than New Zealand workers, meaning they are about 2.3 times more productive than New Zealand workers.
Figure 3 shows the contribution to New Zealand’s labour productivity growth rate of New Zealand’s three main export sectors, the labour productivity of those sectors, and the share of all workers each sector employs. As separate data is not available, export and domestic productivity are combined. None of the three export sectors attains Australia’s average labour productivity of NZ$71 per hour worked. Increasing the size of any or all of these sectors, while maintaining the current average sector productivity, will not close the labour productivity gap. Productivity is limited by competitive advantage (or lack thereof) and improvements by all businesses competing in a sector can lead to price reductions. Productivity is improved only if value gains or efficiency improvements are greater than those achieved by competitors.
It is important not to look at labour productivity in isolation. For example, increases in labour productivity can result when the number employed drops, as low paying jobs are often the first to be lost in response to hard economic times. The size of an industry, total jobs, hours worked and labour productivity determine the overall contribution to the economy, so the contribution of each needs to be considered.
Figure 4 shows how a selection of economies have responded in different ways to the recent recession, with different patterns of change in the factors making up overall output growth – labour productivity, number employed, and annual hours worked per worker. Over 2007-2010 the USA and Ireland achieved labour productivity growth rates more than double those of New Zealand. The gains in the USA and Ireland were due in part to decreased numbers of people employed and a decrease in the annual hours worked in those countries. New Zealand’s increase in labour productivity is partially the result of a decrease in workforce hours while maintaining the number employed. Australia’s productivity growth was similar to New Zealand’s. Australia also experienced a decrease in the annual hours worked (less than in New Zealand) but the total number employed increased slightly.
There is widespread recognition that New Zealand needs to improve labour productivity. In a paper published by the New Zealand Treasury in April 2008, Putting Productivity First, five factors were suggested as drivers of productivity. As identified in the ‘Why labour productivity matters’ section three drivers were considered innovation, skills or talent, investment or capital, along with two others; natural resources and enterprise or entrepreneurship. The Government is seeking to extract more natural resources and is encouraging greater exploration for minerals and hydrocarbons.
Entrepreneurship is important because entrepreneurs identify and deliver the innovations that provide productivity improvements. Institutions and initiatives to encourage entrepreneurship have been established and Government provides funding support.
In March 2010 government announced it would establish a Productivity Commission with the purpose of providing independent advice on ways to boost productivity levels in both the public and private sectors. The Commission is modelled closely on the Australian Productivity Commission and its functions are to:
For proposals to lift labour productivity see the Institute’s publication, A goal is not a strategy: Focusing efforts to improve New Zealand’s prosperity, available on the website http://www.nzinstitute.org/.
Starting below the OECD average and lacking a convincing plan to improve relative labour productivity performance is a poor position to be in. Much attention has been given to labour productivity over the last decade but there has been little result so far. An improvement in the grade of D would require evidence that New Zealand is improving in the OECD rankings.
The 2015 target of $59 is based on Government’s goal of matching Australia’s GDP per capita in 2025.
To match Australia’s projected GDP per capita in 2025 New Zealand will need to achieve straight-line growth of 4.5% per annum. Steadily growing hours worked per capita to return to the average for the five years to 2008 by 2015 will give growth in GDP per capita of 1% per annum. Labour productivity therefore needs to grow by 3.5% per annum. These improvements would result in GDP per hour worked of $59 at 2010 prices.
Figures 1, 2 and 4:The Conference Board (2011, January). Total Economy Database, retrieved 28 February 2011 from http://www.conference-board.org/data/economydatabase/.
Note: Data was reported in 2010 USD for which 2005 EKS purchasing power parities were used, and converted to NZD based on the 2010 average exchange rate reported by the Reserve Bank of New Zealand of 0.7215.
Figure 3: As per Figure 1 and: OECD dataset: Employment by activities and status (ALFS), retrieved 19 April 2011 from http://stats.oecd.org/index.aspx. OECD dataset: Average annual hours actually worked per worker, retrieved 27 April 2011 from http://stats.oecd.org/index.aspx. Statistics New Zealand: Tourism Satellite Account: 2010, Tables 4 and 9, retrieved 27 April 2011 from http://stats.govt.nz/. Statistics New Zealand: Tourism Satellite Account: 2003, Table 6, retrieved 27 April 2011 from http://stats.govt.nz/. Statistics New Zealand: Quarterly Employment Survey – December 2009 quarter, Table 2. Retrieved 27 April 2011 from http://stats.govt.nz/. Statistics New Zealand: Gross Domestic Product – December 2010 quarter and December 2005 quarter, Table 2.2, retrieved 27 April 2011 from http://stats.govt.nz/.
Note: As specific data is not available, annual hours worked for Tourism and Agriculture, Forestry, Fishing and Mining have been assumed as New Zealand’s average annual hours worked per employee. Tourism is based on FTEs but manufacturing, agriculture, forestry, fishing and mining are based on number of employees. As separate data is not available, export and domestic productivity are combined.
Note: Data was converted to real 2009 values with deflators from Statistics New Zealand, Gross Domestic Product – December quarter 2004 and 2010, Table 5.1, Index of Implicit Price deflators retrieved 28 April 2011 from http://stats.govt.nz/.
Note: Overall labour productivity figures for New Zealand, Australia and the OECD average use 2010 data to reflect current values, as shown in Figure 1.
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