Relooking at our productivity gap

New Zealand has a Minister for Economic Growth and therefore, presumably, for productivity also. At the inception, in 2011, of the now disestablished New Zealand Productivity Commission it set out the ‘problem definition’ for its mission as a commission. A centrepiece of the problem definition was the benchmarking of New Zealand’s productivity performance relative to other developed economies, also referred to as the New Zealand productivity ‘gap’.

The productivity ‘gap’ relative to other developed economies in the Organisation of Economic Co-operation and Development (OECD) has not closed, going back now almost six decades since the ‘gap’ first appeared. New Zealand’s gross domestic product (GDP) per capita remains about 30 percent below the average for the top half of the OECD countries.

In recent decades there has been a slowdown in productivity growth, both in New Zealand and across the developed world, particularly since the Global Financial Crisis in 2008. However, our labour productivity gap has widened in relative terms, from 34 percent in 1996 to around 40 percent, compared to the top half of the OECD.

Given New Zealand’s productivity record, relative to other OECD economies over the past decades, one could question whether the framing of our productivity problem through this comparison needs either refining or contextualisation.

The framing of New Zealand’s productivity problem – by comparing our performance relative to other OECD economies as a benchmark – gradually became commonly accepted by economists and officials, and in public discourse.

Yet this approach to tracking our relative productivity performance, while seemingly plausible and intuitive, carries a risk of inadvertently slanting our analysis of this ongoing issue. The causes for our productivity problem are well documented (even if, evidently, they are yet to be addressed), and the diagnosis is unlikely to change no matter which country we compare the New Zealand economy with.  

The notion that New Zealand’s productivity growth and performance ought to be ‘comparable’ to more productive OECD economies is, however, arguably becoming increasingly debatable given our productivity track record.  

New Zealand’s economic performance, including productivity growth, is commonly assessed by either comparing it to economies at a similar level of development (such as other OECD economies) or a similar size (whether measured by GDP or population).  

‘Small Open Economies’ for example Ireland, the Nordic nations (Denmark, Sweden, Finland, and Norway), Singapore, and others, often feature as comparators to New Zealand. But these economies may not always, or necessarily, be the most justified or insightful for policy analysis to compare ourselves with.

The Productivity Commission noted that New Zealand is one of a small number of OECD countries with both a low level of labour productivity and low productivity growth. Countries with productivity records similar to New Zealand are Mexico, Greece, Portugal, Israel, and Japan. It might be beneficial for us to also look at these countries that are facing the same challenges as New Zealand. 

Rather, it is to be clearer about what is unique, or not, about New Zealand compared with other OECD economies, and what the implications are for our understanding of New Zealand’s productivity potential. It is not unusual for policy analysis and discussions of New Zealand’s productivity to compare our performance with other OECD economies, while simultaneously explaining these differences away by then pointing to what is unique about New Zealand.  

Our productivity performance aspirations could be better contextualised, including with respect to which countries we choose to compare ourselves with. Crucially, differentiating factors that are amenable to policy levers, from those that are not or are less so, remains the key. 

In its latest economic forecast updates, Treasury has been revising down its labour productivity growth forecasts for the coming years. 

Productivity growth underpins the viability and sustainability of the key pillars of our economic and fiscal model, for example superannuation. The incoming Secretary to the Treasury, Iain Rennie, commented in December 2024 about the need for sustained productivity growth to fund superannuation over the next 25 years, so that it can contain its otherwise projected impact on government debt.

Given our productivity performance record over the past three decades, a productive starting point (pun intended) would be an objective assessment of our current and future productivity potential, including by reviewing which other economies’ productivity we should, or can, aspire to match. Explaining away our low productivity is not a helpful policy setting and has not served us well.