How often have we been told that New Zealand is a productivity laggard?
The prime minister famously told a London School of Economics audience only four years ago that the economy "marked time" in the 1990s (even though it grew by about 30% in the decade) and that the 1984-88 and 1990-91 reforms were failed policies.
Council of Trade Union officials routinely said things like "the neo-liberal reforms of the past 15 years have not produced a stronger economy nor improved labour productivity."
The New Zealand Institute chimed in, saying that our labour productivity is actually deteriorating relative to other countries.
Economist Brian Easton wrote just last year that "we have to move from a low productivity growth/labour extensive growth strategy to a high productivity one because the sources of labour are running out."
Even people who should have known better joined the chorus. Academic John McMillan wrote, "Productivity in New Zealand grew slowly during the 1990s." A 2001 New Zealand Institute of Economic Research report said the "lift in productivity from structural change was very small."
These claims were severely shaken by a new study released by Statistics New Zealand last week. Its key finding was that labour productivity in the sector of the economy in which it can be measured with some confidence (essentially the business sector) has grown by an impressive 2.6 per annum on average since 1988. This performance is slightly ahead of Australia’s and compares favourably with most OECD countries.
Was there any excuse for the earlier myth-mongering? No. Earlier studies had also identified major productivity gains from the Douglas/Richardson reforms.
A major study by Erwin Diewert and Denis Lawrence published in 1999 found that "After 1993 there was a productivity surge. This is likely to have been aided by the effects of the labour market reforms of the early 1990s, among other things." It also found that New Zealand had roughly matched Australia’s productivity performance.
A Treasury study published in 2003 reported "a noticeable improvement in market sector multifactor productivity after 1993", and OECD estimates published in the OECD Economic Outlook suggested that New Zealand’s productivity performance had been similar to that of a range of other OECD countries.
It should have been obvious to any objective observer that New Zealand’s stronger economic growth performance since the early 1990s, when the benefits of the economic reforms showed up, would not have happened without improvements in productivity.
Moreover, claims about low productivity growth were inconsistent with the practical experience of many firms in increasing their efficiency, especially after the labour market was freed up.
A common finding has been that measured Australian productivity growth has owed more to capital investment than has been the case in New Zealand. However, this is not necessarily a point in Australia’s favour. With its freer labour market, New Zealand did better in absorbing more low-skilled, low-productivity workers from the ranks of the unemployed into the labour force.
There are other interesting findings in the Statistics New Zealand series.
The new data show that from 1993 to 2005, when the annual average growth in output was 4.1 percent, labour productivity accounted for most of it – growing by 2.4 percent a year on average while labour input increased by 1.6 percent a year.
They also point to a marked weakening of annual average productivity growth since 2000. Compared with the 1993-2000 period, labour productivity growth halved in 2000-2005 and the multifactor productivity growth rate fell from 2.7 percent to 1.1 percent. This suggests that recent anti-growth policies such as high government spending and taxation and labour market re-regulation have been damaging to productivity and economic growth prospects, as business organisations have argued.
Moreover, the Treasury estimates that economy-wide labour productivity growth going forward will only be 1.5 percent per annum, and even this estimate may be too high.
The Statistics New Zealand study covers industries accounting for about 65 percent of the economy. Left out, notably, is the public sector. Economy-wide labour productivity improvements have been lower than those in the measured sector. This suggests that the major gains have been in private sector industries that have been deregulated and privatised whereas state-dominated sectors such as health are lagging.
Although the Statistics New Zealand series may not be the last word on the subject, the findings turn much of the debate about productivity on its head.
New Zealand does not need government working parties on private sector productivity, interventionist industry policies, forced savings schemes or a payroll tax to encourage productivity growth.
Instead it needs to press on with policies that produced the earlier gains, such as lower taxes, greater labour market freedom, less regulation of the business sector and greater attention by the government to problems of low productivity in the public sector, in areas such as health.
And it would be nice if some of the naysayers had the grace to eat their words.
Roger Kerr is the executive director of the New Zealand Business Roundtable
© Copyright; Foundation for Economic Growth and various authors. Individual authors retain their own copyright.
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