At time when politicians were peppering the economic debate with proposals and counter-proposals for propelling us back up the OECD ladder, improving our incomes per capita, and what-have-you, new set of data from Statistics New Zealand was welcome. It was an annual productivity series, providing information on the country’s labour, capital and multi-factor productivity growth.
The new series did not embrace the whole economy, alas, but confined its coverage to the so-called “measured sector”. This left out significant chunk of activity: central and local government, education, health, property services and business services. Trouble is, there are problems measuring the outputs from those sectors, and dependable measurements of outputs are prerequisite for measuring productivity.
For the period covered by the statistics, the measured sector contributed 65 percent of total industry GDP and accounted for 69 percent of total paid hours. But most of the growth in labour occurred in the property, business and commercial services industry, and to lesser extent health and education. These tend to be labour-intensive sectors.
On the other hand, the output from these sectors has tended to grow more slowly than it has from sectors covered by the new statistics. As Statistics New Zealand explained, productivity is measure of how efficiently production inputs are being used to produce economic outputs. Productivity measures may be single-factor (relating measure of output to single measure of input) or multi-factor (relating measure of output to bundle of inputs).
Measures of productivity growth and productivity levels are important economic indicators. Productivity growth is the basis for improvements in real incomes and welfare. Slow productivity growth limits the rate at which real incomes can improve. It also increases prospects of conflicting demands when it comes to distributing income, or sharing the national pie.
The headline-grabber in the first set of official statistics was the figure showing average annual growth in labour productivity was 2.6 percent in the measured sector from 1988 to 2005. Labour productivity increased by 55.7 percent during those 17 years.
Average annual growth in capital productivity was just 0.3 percent, however, dragging down the average annual growth in multi-factor productivity to 1.8 percent.
These estimates of the country’s productivity growth throw fresh light on debates about the country’s economic performance. For starters, they undermine common perceptions that New Zealand’s productivity performance over the past decade was low.
The conventional wisdom was that New Zealand’s economic growth had picked up quite strongly from 1993, thanks mainly to an increased level of inputs – predominantly labour – with some improvement in multi-factor productivity over the later years. Investment levels were believed to be low (relative to Australia), resulting in only small lift in labour productivity because of so-called “capital deepening”.
Even though it was improving, labour productivity growth rates were thought to be below the OECD median and rates achieved by Australia over the past decade or so, putting them around 1.5 percent annually.
The annual average growth rate in multi-factor for the 1993-2005 period is equal to two percent. That’s the rate often cited as the goal if the country is to reverse its decline in GDP per capita, relative to the OECD. This means we have cranked up our performance to what must be done. The challenge is to keep going at that pace for several more years.
Average real GDP growth during the 17-year period was 2.8 percent, thanks to contributions from capital (one percent) and multi-factor productivity (a relatively high 1.8 percent). But there was zero growth in labour inputs.
Really? This is at odds with the general understanding that much of the country’s GDP growth over the past decade can be accounted for by increased labour utilisation.
Much of the recorded labour growth, of course, has been in the non-measured sector, and many of the “unofficial” productivity analyses, including published OECD statistics, refer to the total economy.
Moreover, the labour utilisation rate did grow in the measured sector post-1994. But not enough. Because of the high rate of labour-shedding in the earlier period, labour input growth when measured across the full series is nil.
There’s more work to be done. Statistics New Zealand hopes to persuade the Government to cough up the necessary resources to enable future releases to present historical series from 1977/78 (or earlier), with additional industry analyses. But to extend the measures to embrace the whole economy, the statisticians must derive meaningful output measures for non-market industries – bureaucrats, judges, nurses, teachers and so on. For business men and women, too, come to think of it.
Bob Edlin is regular contributor to Management.
