The reality behind the boom

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A Productivity Commission Report published today shows that New Zealand’s productivity measure remains well below the OECD average and has been “stuck in first gear” through both Labour and National governments since 1996.

And the report suggests that New Zealand’s wealth creation is strongest in the service sector in Auckland and Wellington and lower in the provincial hinterland.

“In the 10 years since the Global Financial Crisis labour productivity growth has slowed, with the average annual labour productivity in the measured sector being 1.0% between 2008 and 2018

“If the recent slowdown was to become permanent and New Zealand continued to achieve 1.0% productivity growth across the total economy (rather than 1.5% as assumed in the Treasury’s long-term fiscal model), then by 2059-60 real GDP would be around 18% smaller than otherwise.

“This is equivalent to $16,300 per person (in constant 2009/10 dollars). “

Productivity varies from sector to sector.

“Since 1996, information, media and telecommunications, retail trade, and financial and insurance services have had strong labour productivity growth and growing shares of GDP.

“Construction and professional, scientific and technical services both experienced large increases in their share of GDP but had labour productivity below the measured sector average.”

And there are also regional variations. Not surprisingly given the productivity growth in the services sector, in 2017, Auckland and Wellington had shares of GDP higher than their population shares.

“In contrast, regions such as Manawatu, Waikato, Northland, and the Bay of Plenty had population shares larger than their shares of output.”

”New Zealand’s poor productivity performance has been a persistent problem over decades and turning this around will require consistent and focussed effort over many fronts and for many years,” the report says.

“There is no simple, quick fix.

“Candidates for reform include competition policy, infrastructure, science and innovation, and education and the labour market. Firms’ management practices and ability to learn (absorptive capacity) need improvement, and there are challenges facing the public sector, e.g., regarding policy-making capability (including the use of monitoring and evaluation), regulatory design and practices, and the delivery of services in the education and health sectors.”

ASB senior economist Mark Smith, commenting on the productivity research said  productivity mattered as a key determinant for living standards, so lifting overall productivity should be towards the top of the list for Government policy-makers.

“NZ's recent lacklustre labour productivity performance has been masked by strong population growth and the elevated Terms of Trade, which has boosted economywide purchasing power and contributed to the 'feel good factor' NZ has experienced of late, "he said.

“There are limits to how high our Terms of Trade can go, given our lack of pricing power on many international markets.

“Rather than continuing to count on strong population growth and the Terms of Trade being our get out of jail free cards, strengthening economywide labour productivity is an important route to sustainably bolster living standards, overall GDP and general wellbeing.

“Focus on lifting our productive capital stock, improving skills, vocational training increased research & development, and further bolstering labour market flexibility should help.”

 

The Auckland Employers and Manufacturers Association (EMA) were quick yesterday to provide some answers to the productivity challenge from their perspective.

 

They said new research they had commissioned showed  successive governments were no longer keeping an accurate tally of the cost to business of complying with regulation and the impact new regulations had on productivity.

 

An NZIER report released by the EMA noted that in 2016, the cost of compliance for business was $5 billion, or 2.9 per cent of Gross Domestic Product (GDP), but that is based on 2012 data because government has not updated accurate figures since 2012.

 

Clearly, said Brett O’Riley, chief executive of the EMA  that cost would be much higher today.

 

"On one hand, businesses are being urged to improve productivity, but on the other there is an increasing focus on compliance with government requirements that individually might be manageable, but together exponentially increase compliance workload," he said.

 

"In the past there was comprehensive measurement and assessment of those costs, but since this has fallen by the wayside we’ve had major new legislation in areas such as health and safety and employment law, all increasing business compliance costs."

 

“Each of the businesses NZIER spoke to highlighted the cost of compliance was not just about money, but time, with the load being particularly heavy for management unless they hired a specialist resource.”

The blogger “Croaking Cassandra”, former Reserve Bank economist, Michael Reddell. also, yesterday commented on our low productivity.

“Treasury has consistently expected a significant recovery in productivity growth, and it has equally consistently failed to arrive, "he said.

“Is there any reason to think they are more likely to be right now?  

“It isn't as if anything much in the policy framework has changed for the better.”

Because productivity is a measure of how much "labour" goes into each dollar of GDP earned, the size of the workforce matters.

the report concludes that though  immigration has been a key driver of population growth, it may have had less of an impact on productivity.

It says the population has increased by 28% since 1996 and immigration contributed 50% of the growth since 2008.

But over the same period, hours of work increased by only around one point three  per cent a year. That was below population growth.

And the share of wealth being won by wage-earners is also declining.

“From 1996 to 2017 showed a fall in the labour income share from 57.4% to 55.4% of national income,” the report said.

“The labour income share mostly declined in three short bursts: 1982-1984, 1992-1995, and 1999-2002.”

The report is a sober reminder, one week after the Budget, that there is much to be done if New Zealand is to substantially improve the living standards of its citizens.

 

 

 

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