Over the past decade there has been much debate about New Zealand's productivity performance.

The impact on productivity growth of the economic reforms of the late 1980s and early 1990s is only one measure of their benefits. Others include much lower inflation rates, public debt and unemployment, fiscal surpluses and higher rates of job creation.

There has been a tendency to acknowledge some of these benefits but to question whether policy reform improved New Zealand's productivity performance. Economists such as Brian Philpott, Brian Easton and Tim Hazledine were among the sceptics, and the productivity issue was central to politicians' claims of "failed policies".

The debate is important because productivity is the most important source of sustained growth in a country's average per capita income.

But productivity is notoriously difficult to measure. There are several concepts and each can be measured in different ways. Productivity measurement in the Government and services sectors is particularly problematical - data are subject to revisions that sometimes go back many years, economic cycles need to be taken into account, and changes in trends may not be apparent for many years.

Nevertheless, by the second half of the 1990s the judgments of the sceptics should have been more cautious. There was abundant evidence that firms were using labour, plant, machinery and buildings more efficiently, helped by the Employment Contracts Act.

The average annual rate of real economic growth of 4 per cent in the five years to 1996 suggested more than a cyclical rebound.

More importantly, a 1996 study by Professor Viv Hall, of Victoria University, reported a pattern of productivity trends that has been generally confirmed in subsequent work.

Hall's study showed a major improvement in capital productivity and total factor productivity from 1992, compared with the period since 1979, but only a slight increase in labour productivity.

Total, or multifactor, productivity measures are the most important as they show changes in the efficiency with which the economy uses all economic resources. In the mid-1990s, when the economy was absorbing large numbers of unemployed workers, it would have been unrealistic to expect big gains in labour productivity.

(In the late 1980s, labour productivity growth was strong, but largely because of job shedding due to restructuring and a relatively rigid labour market.)

Until recently, the benchmark productivity study was the 1999 report by Denis Lawrence and Erwin Diewert. "After 1993 there was a productivity surge," it found. "This is likely to have been aided by the effects of the labour market reforms of the early 1990s."

NZ's productivity performance after 1993 also seemed to be "at least comparable" with Australia's.

Two recent studies have updated these findings.

A Treasury study by Melleny Black, Melody Guy and Nathan McLellan finds a noticeable improvement in average annual multifactor productivity growth from 0.09 per cent in the period 1988 to 1993 to 1.32 per cent in 1993 to last year.

It also finds that multifactor growth post-1993 has been similar in aggregate and across industries for Australia and New Zealand. Labour productivity growth rates differ between the two countries because of the different evolution of capital-labour ratios.

Similarly, a Labour Department study by Weshah Razzak finds that productivity growth based on the trend growth rate of real gross domestic product (GDP) per working-age population was 1.99 per cent from 1993-2001, well over twice the annual rate of 0.74 per cent in 1970-1992.

As an Australian Productivity Commission researcher noted recently, "An acceleration in trend productivity growth of 1 percentage point or so is extraordinary. It is well in advance of the performance in nearly all other OECD economies."

An extra percentage point in productivity growth adds the same increase to the average incomes of New Zealanders. In the last decade, New Zealand's real per capita GDP grew 2.5 per cent a year on average, a significantly higher rate than was achieved in the 1970s and 1980s.

Having regard to higher Government spending on services such as health and education in that period, it is not credible to suggest that the vast majority of New Zealanders did not benefit from this improvement.

Razzak's study concludes: "New Zealand needs more capitalism, not less ... Fiscal policy should not scare capital and labour away from New Zealand by over-taxing them."

To achieve the Government's goal of restoring our average income level to the top half of the OECD, NZ's productivity growth rate needs to rise further. To date there is no sign of this in official projections.

For more information, contact:

Roger Kerr
Executive Director
Ph: 04 499 0790
Email: rkerr@nzbr.org.nz

David Young
Communications Manager
Ph: 04 499 0790
Email: dyoung@nzbr.org.nz

Web: www.nzbr.org.nz