Productivity Commission targets weak labour productivity

28 November 2016

Productivity Commission targets New Zealand’s weak labour productivity

New Zealand has enjoyed good growth in average income since the global financial crisis. Labour participation is strong and our public finances are in relatively good shape. But one area holding the economy back is our persistently weak labour productivity, with the OECD estimating that New Zealand had the fourth lowest labour productivity growth of OECD countries between 1995 and 2014.

Fortunately New Zealand is in a good position to address this area of persistent weakness.

Achieving New Zealand’s productivity potential is the Productivity Commission’s commentary on New Zealand’s productivity performance. The report shows that New Zealand needs to shift from a model based on working more hours per person to one that is focused on generating more value from time spent at work. “With labour force participation forecast to decline with population ageing, the focus now needs to go on lifting productivity” says Paul Conway, Director of Economics and Research at the Productivity Commission.

The report draws on powerful new data (the Longitudinal Business Database) to provide a fresh and practical insight on New Zealand’s productivity performance.

“There is a view that some businesses stop growing once the owners achieve ‘the three Bs – a bach, boat and BMW’. But new evidence means we can look beyond this and better understand what in the business environment is holding back some Kiwi firms. We can measure the impact of small domestic markets, low levels of competition in services, and the role of barriers to export success, like market knowledge and financing.” says Mr Conway.

With technology creating new opportunities for small and remotely-located firms, an important challenge is to improve the flexibility and resilience of the economy to make the most of important changes in the global economy. The Government has implemented a Business Growth Agenda (BGA) with the aim of building a more productive and competitive economy. The report’s analysis shows that the BGA is targeting the right areas.

“The BGA is subject to annual review. This means that it can respond and evolve as knowledge of the New Zealand economy deepens. Our report gives the Government further insight into why our productivity performance is not as good as it could be and informs possible changes to the BGA that could make a difference” says Mr Conway.

The report highlights several areas for further work, including housing market reform so that people can live where their skills are most valued, and lifting the skill composition of migrants. The report also emphasises practical measures to lift competition in the services sector. Connections across the innovation system could also be strengthened, and the Foreign Direct Investment regime and remaining tariffs need review in the context of growing international trade in services and digital products.

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