Industry productivity and the Australia-New Zealand income gap - NZIER working paper 2011/3

Productivity gap due to underperformance of services, not lack of capital

The main reason for the growing income gap between New Zealand and Australia are differences in the quality of management, process innovation and the quality of labour and capital, finds new research released by NZIER.

This finding contrasts with the more conventional belief that a lack of capital intensity or differences in mining wealth is the issue.

“When we adjust for differences in the structure of our economy, we find that the income gap with Australia is not so much because it does different things, but because, in the things we do too, Australia does it better”, said Jean-Pierre de Raad, NZIER’s chief executive.

“Only 30% of the productivity gap is due to the structure of the economy. Mining is not the secret to Australia’s success.”

“We also find that capital intensity is not the main thing we should be concerned about, as differences primarily reflect economic structures. Instead, New Zealand’s main problem is the underperformance of industries.”

“New Zealand clearly outperforms Australia in agriculture, energy and water supply, and mining. But the services sector performs poorly. This is a problem given the sheer size of that sector.”

The report concludes there is a need for a greater focus on the quality of labour, capital, and management, and the regulatory environment. Improvement in skills, management capability, organisational quality and regulations can have a profound effect on New Zealand’s growth potential because they improve the overall economic environment and increase the capacity to innovate.

“The OECD has pointed out that our reputation for the quality of regulation has eroded. We also still have more than one million people in the workforce who have only basic or no qualifications. Many lack basic literacy, numeracy, and language skills. To be able to compete, our industries need skilled labour that can adopt and operate new technologies and processes.”

You can read the full paper here.