February 11, 2019

Poor productivity will jeopardise wellbeing gains

As has been widely heralded, New Zealand will have its first Wellbeing Budget this year.  Instead of focussing narrowly on growing the economy, the Budget will aim to develop the four capitals (Human, Social, Environmental and Physical & Financial) that underpin good living standards.  The government has signalled that, amongst other things, the Budget will include measures to: 

  • create opportunities for businesses, regions, iwi and others to transition to a low emissions economy; 
  • promote innovation, social and economic opportunities in the 'digital age'; 
  • lift Māori and Pacific incomes, skills and opportunities;
  • reduce child poverty, improve child wellbeing and reduce family violence; and
  • support mental health, with a specific focus on under 24-year-olds.

An emphasis on general wellbeing is important, of course, but the fact remains that the scope to effect wellbeing improvements depends to a large extent on achieving productivity improvements in the economy.

The Productivity Commission has stated that: “Generally speaking, the higher the productivity of a country, the higher the living standards that it can afford and the more options it has to choose from to improve wellbeing. Wellbeing can be increased by things like quality healthcare and education; excellent roads and other infrastructure; safer communities; stronger support for people who need it; and improved environmental standards.”1

Similarly, the Treasury has stated that: “Productivity is the biggest long-run determinant of wages and living standards. Our capacity to raise our standard of living depends on our ability to raise output per worker – the amount of goods and services each worker produces and the value they add.”2

And, therein lies the problem for the government: in recent years, New Zealand’s productivity performance has been poor.

Productivity is most often assessed in terms of labour productivity; and the two graphs below show different measures, both based on data from Statistics New Zealand, of how this has changed in recent years.

Both graphs show that labour productivity in New Zealand has been falling for three years. And both show that labour productivity is now no higher than it was 6 years ago.

The first graph shows how the amount of real GDP3 per person employed changed up to the third quarter of 20184. To make things clearer, the data is presented in index format, with real GDP per person in the third quarter of 2000 set to a value of 100. It implies that labour productivity was only 11 percent higher at the end of the period than it was at the beginning.

The second graph allows for the fact that the average number of hours employed people work has fallen over time, and it shows how the amount of real GDP per hour worked changed up to the third quarter of 2018. It presents a slightly more positive picture than the first graph, in that it implies that labour productivity was around 17 percent higher at the end of the period than it was at the beginning.

However, the worrying feature is that both graphs show that labour productivity in New Zealand has been falling for three years. And both show that labour productivity is now no higher than it was 6 years ago.

In a future article, I will explore why labour productivity growth has been so slow, but it can be said now that the reasons are not obvious from the source data.

It is also important to state that labour productivity is not the only aspect of productivity that deserves attention. Multi-factor productivity, which is the ratio of outputs (e.g. real GDP) to all types of inputs (e.g. labour, capital and technology), is a conceptually better measure of economic efficiency, but it is difficult to calculate. Statistics New Zealand publishes estimates of multifactor productivity, but they are not up to date. However, it is worth noting that the latest estimates indicate that multifactor productivity grew more slowly than labour productivity between 2000 and 2017.

https://www.productivity.govt.nz/about-us/why-is-productivity-important

https://treasury.govt.nz/information-and-services/nz-economy/productivity

i.e. GDP expressed in constant 2009/10 prices

Employment data for the fourth quarter of 2018 is now available, but GDP data currently only goes up to the third quarter.