Why productivity?

As a measure for how efficiently inputs are converted into outputs, productivity is the biggest long-run determinant of wages and living standards. 

New Zealand’s productivity performance has lagged that of other advanced economies since the early 1970s

At an economy-wide level, New Zealand’s labour productivity performance (as measured by output/GDP per hour worked) fell behind that of other advanced economies in the early 1970s. This marked the beginning of a long period of relative decline, with New Zealand’s productivity levels continuing to diverge through to the mid-2000s. 

Many factors have contributed to New Zealand’s productivity performance, such as:

• low capital intensity (the amount of machinery and equipment per worker) 
• low investment in research and development (R&D), innovation and managerial capability (knowledge-based capital)
• small population spread over a large geographic area, which means firms in many markets face weak competition and struggle to achieve scale 
• distance from international markets, which means firms are not well connected internationally through trade and investment 
• macroeconomic imbalances, such as low savings rate.

New Zealand’s poor productivity performance reflects its structural composition, with a focus on low productivity sectors. Unlike other economies, our economy has not diversified to the same extent into new high-tech/knowledge-intensive export industries.

Since the early 2000s, many advanced economies, including New Zealand, have seen productivity growth slow and it is not clear why

There have been many explanations proposed for the slow-down, such as slowing diffusion of innovation and technology, and declining business dynamism (eg declining firm entry and exit, and increasing market concentration).^[1] However, there is still much debate about how relevant these factors are, particularly in the New Zealand context.

Importantly, we don’t know much about how New Zealand’s productivity performance might change in the future

While we know much about New Zealand’s past and current productivity performance, we have a more limited understanding of our likely future productivity performance. Our future productivity performance is likely to depend on the underlying drivers of our past and present performance, the impacts of global forces and trends and their interactions with New Zealand-specific factors, such as our geographic location and capabilities.

Footnote

^[1] The productivity slowdown: implications for the Treasury’s forecasts and projections(external link) — The Treasury (2024)

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