Labour Productivity Growth Grinds to a Halt

Labour Productivity Growth Grinds to a Halt

“The deterioration in New Zealand’s productivity growth performance in recent years looks likely to have continued in the year ended March 2007”, Roger Kerr, executive director of the New Zealand Business Roundtable, said today.

“Indeed labour productivity in what Statistics New Zealand calls the measured sector of the economy – essentially the business sector – may have been static in the latest year.”

Mr Kerr said that the recent release by Statistics New Zealand on growth in real gross domestic product for the year ended March 2007 allowed estimates of productivity growth for that year to be made. The official, more sophisticated, Statistics New Zealand productivity figures will not be available until March 2008. The official figure for labour productivity growth for the year to March 2006 was 0.7 percent, one of the lowest on record.

With real GDP growth of only 1.7 percent in the year to March 2007 and positive economy-wide employment growth, it is clear that labour productivity growth in that year was weak. A regression-based projection suggests a decline in measured sector labour productivity of -0.1 percent for the year, an essentially static outcome.

Capital productivity growth and multifactor productivity growth for 2006-07 are also likely to be poor.

“From any perspective, New Zealand’s recent productivity trend has been abysmal”, Mr Kerr said.

“As the attached chart shows, there was strong trend growth in measured sector labour productivity of 2.7 percent a year on average in 1992-2000, the period following the reforms of the 1980s and early 1990s.

“During the present government’s term of office, that trend rate of growth has been only 1.3 percent in 2000-06 and looks likely to fall further when the series is updated. A similar fall is apparent in the rate of growth of multifactor productivity.”

Mr Kerr said that these trends were strong evidence that government policies of high spending and taxation, a less flexible labour market, increasing regulation and other policies that have reduced economic freedom were damaging productivity in the business sector and reducing the country’s growth outlook. The productivity performance of the public sector may have been even worse.

“While there is still some scope to increase labour utilisation, labour productivity growth is almost the only thing that matters for growth in output per capita and hence living standards in the long run”, Mr Kerr said. “Annual productivity growth rates of 3 percent or more on average are needed for fast economic growth.

“Present trends indicate that New Zealand is falling well behind the productivity performance of the United States and Australia, and there is no prospect that it will regain a place in the top half of the OECD income rankings with present policy settings.

“Despite Australia’s superior performance, a lively debate about productivity is occurring in that country in the run-up to this year’s Australian election. Our productivity trend should be a high profile issue for the government, other political parties and the media in this country too”, Mr Kerr concluded.

ENDS

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