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Productivity is about how efficiently a firm or any other organisation can turn its inputs, such as labour and capital, into outputs in the form of goods and services. Over the long term, productivity is the key determinant of a country’s material standard of living. New Zealand’s level of labour productivity remains relatively low in comparison to other developed countries.
The ability to gauge productivity varies across the economy. Although there are still significant issues, productivity measurement in New Zealand has improved with official productivity data for the measured sector. Gaps remain in the measurement of the service and public sectors and in terms of industry detail. These gaps highlight the need for ongoing investment in measuring outputs, inputs and productivity. The analysis in this paper focuses on the measured sector, but also looks at economy-wide measures given their role in international comparisons and forecasting, as well as being more up-to-date.
The paper finds that productivity growth in New Zealand’s measured sector has been on a par with that of Australia over the last two decades. However, productivity growth in New Zealand’s measured sector since 2000, the end of the last growth cycle as assessed by Statistics New Zealand, has been below average. Analysis of recent trends is not definitive as the latest productivity cycle is not yet finished. At the economy-wide level, labour productivity growth has also had periods of weakness since 2000, but this experience has been shared by some other developed nations and a rebound has been witnessed in the recent economic upturn.
This paper also looks at possible explanations of the more recent period of below-average productivity performance. The explanations considered relate to employment growth, changes in labour quality, and industry and sector developments. The fact that recent growth in output has been sourced more from labour utilisation than labour productivity reflects a labour market performance that has seen rising participation and falling unemployment. Given the available information, it is difficult to isolate and weight the relative importance of the explanations because of uncertainty around variables and data limitations. Limitations on our ability to fully explain past productivity performance need not detract from the importance of efforts to raise future productivity performance.
This paper was prepared by John Janssen and Simon McLoughlin. Comments were provided by staff in the Treasury, especially Mark Blackmore, Bob Buckle, Patrick Conway, Mario DiMaio, Geoff Lewis and Kam Leong Szeto. Comments were also provided by Dirk Pilat (OECD), Statistics New Zealand and participants at a cross-government productivity workshop in December 2007.