Why New Zealand has Productivity Wrong
Recap of previous article ‘Is Productivity Growth the Gateway to Prosperity for New Zealand?’:
My last Blog covered the two basic ways of growing the economy, either via Labour Utilization or Labour Productivity or more realistically, a combination of both. I also mentioned that first world countries, whilst adopting both, should be focussing on Labour Productivity.
New Zealand’s productivity performance for the past 18 years.
Let’s review New Zealand’s productivity performance over the past 18 years (i.e.) since 2000, and see how we have fared in regards to these strategies.
Since the year 2000, the NZ economy has grown around 50%. But GDP growth per hour worked or how much we produce per hour worked has only increased 13% over the same period.
Therefore, only 26% of our GDP growth has come from productivity gain through Labour Productivity (i.e.) working smarter rather than harder.
The other 74% has come from higher Labour Utilization (i.e.) working more hours – Working harder!
This means that although the NZ economy is growing, we are achieving this via inefficient means compared to our OECD neighbours.
More concerning, since 2012, productivity gains from higher Labour Productivity has stalled. This means that for the past five years, all New Zealand’s economic growth has relied on more people working more hours.
In 2014, GDP per capita in NZ (How much each person produces to the overall wealth) was 20% below Australia and 40% below the USA!
The below table demonstrates very clearly what I am getting at.
Australia is more productive than New Zealand!
If we compare New Zealand’s results to Australia’s results, we see clearly that our Labour Utilization is very high, Third highest behind Turkey and Mexico.
Compare this to our Labour Productivity, one of the lowest. If we compare this to Australia, we see that their Labour Utilization is negative, meaning they have reduced their reliance on labour hours to generate productivity.
If we now look at their Labour Productivity we see they are the fourth highest. Meaning that the Australians have successfully implemented technology to increase output per labour hour.
Immigration has been driving NZ’s Labour Utilisation Strategy.
I mentioned in my first blog that government has not made this disequilibrium in productivity gains a big deal because our economy has been growing well since 2008. However, as we can now see, this has been due to more people working more hours. And given that our labour costs are cheap compared to other first world countries, this strategy was working.
The National Government was not keen to put the brakes on immigration, as these relatively cheap immigrants in terms of hourly rates of pay were assisting to grow our productivity growth albeit through Labour Utilisation rather than Labour Productivity.
So, what has been the result of this strategy?
The result of this Labour Utilisation strategy is infrastructure at breaking point, clogged motorways and rising housing prices due to not enough houses to cope with the high levels of immigration.
Now that the Coalition Government is in power, despite their hyperbole on cutting immigration numbers, nothing has yet been done due to our productivity problem. If immigration is cut, the economy will stall due to our reliance on Labour Utilisation as a growth strategy.
But wait it gets worse!
Join me next time as we continue this discussion.
Read on in my next article ‘Why New Zealand is heading for a Productivity crisis’.
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