February 21, 2022

Productivity continues to grow at snail’s pace

Other countries continue to outperform us

The Productivity Commission states that productivity is about ‘working smarter’ rather than ‘working harder’, but in comparison to other nations, this isn’t what New Zealand is doing.

In 2019, New Zealanders worked more hours and produced less gross domestic product (GDP) per hour in comparison to the Organisation for Economic Co-operation and Development (OECD) average. This has been the case for decades, our laid back culture and relatively smaller amounts of capital investment compared to other countries, has led to the growth of our productivity lagging behind. 

This has prevented us from securing living standard improvements as quickly as other countries. Apart from anything else, our wages and salaries are low. COVID-19 has only further pronounced these issues within our economy, with the need for improvements growing. 

The most recent release of New Zealand’s productivity statistics from Statistics New Zealand captures the initial phases of COVID-19, excluding the delta and omicron variants. The results show varying impacts across industries, but for the year ended March 2021, New Zealand’s labour, capital and multi-factor productivity growth has continued to be slow. 

Labour productivity growth continues to slow

Labour productivity measures the output of individuals per hour worked and, in 2021, labour productivity increased by 0.5 percent. This increase came as a result of a 2.6 percent decrease in labour inputs (hours worked) outweighing a corresponding 2.2 percent decrease in labour outputs. 

This means that New Zealand’s already slow labour productivity growth, has slowed even further. Labour productivity of the measured sector, which covers around three quarters of total industry contribution to GDP, has followed a similar downwards trend as previous years, as seen in the graph below. 

Breaking labour productivity down further, there has been notable decreases in some industries, with labour productivity in goods-producing industries decreasing by 1.4 percent in 2021. This was largely driven by an 8.8 percent decrease in labour productivity in electricity, gas, water, and waste services. 

Furthermore, some service industries suffered significant decreases in labour productivity in 2021.

These include:
•    Administrative and support services, with a 10.8 percent decrease
•    Transport, postal, and warehousing, with a 10.7 percent decrease
•    Information media and telecommunications, with a 10.7 percent decrease.

Meanwhile, some other industries experienced notable increases to labour productivity, highlighting the varying impact COVID-19 had on productivity in the economy. Industries such as, retail trade (8.3 percent increase) and accommodation and food services (8.6 percent increase), experienced increases to labour productivity. 

Primary industries have led growth in capital and multi-factor productivity

Capital productivity measures the amount of economic output which is generated per unit of capital investment (e.g. investment in land, buildings, machinery, etc.). After a 0.2 percent decrease in 2020, New Zealand’s capital productivity increased by one percent in 2021. 

Additionally, multi-factor productivity, which measures labour and capital inputs used by businesses, increased by 0.7 percent in 2021. Similar to labour productivity, the increases in capital and multi-factor productivity were a result of decreases in inputs simply outweighing decreases in outputs.

In 2021, the main driver of increases in capital and multi-factor productivity were primary industries. Capital and multi-factor productivity in primary industries increased by 4.7 percent and 4.5 percent in 2021, respectively, most likely reflecting good investment in technological advancement or machinery to improve production processes for businesses.  

Productivity through growth cycles paints a similar picture

For a clearer and more sound analysis, productivity is often analysed across growth cycles. Doing so enables explicit measures, such as capital utilisation, to be better accounted for. New Zealand’s labour productivity across our four growth cycles since 1997, with the current growth cycle not ended, showed a declining trend. Between 1997 and 2000, labour productivity growth was 2.8 percent, but in our current growth cycle (2019 to 2020) labour productivity has reduced to 0.7 percent. The decline in productivity growth was not only seen for labour productivity, but for capital and multi-factor too.

The benefits of strong productivity growth are exactly what New Zealand needs

Currently, we are facing inflation, decreasing real wages, and slow economic growth, with no certain end in sight. Strong productivity growth would ease the effects of these issues. However, it looks unlikely that our slow productivity growth will pick up anytime soon. The potential to improve our living standards are, therefore, limited.