You will hear a lot about productivity these days because it is the main driver of economic prosperity. The government has even established a productivity taskforce headed by Dr. Don Brash to see how we can catch up with Australia. So what is the fuss about, and why is productivity so important?
What is productivity?
Productivity is a fairly easy concept to understand: if we work smarter then we can get the same result for less effort. It could be the difference between doing a long calculation by hand as opposed to using a computer. The economy is the same: investing in better capital, better technology, or training and education, can all lead to increases in GDP.
But robots don’t buy anything so, even if the factory is working better with robots, the economy may not be getting richer. What we are really interested in is making people work smarter and getting more production for each hour of work. That is why productivity is usually calculated as GDP per hour worked. That measures the added value that is created by an hour of someone’s labour.
Why all the fuss?
Increasing productivity is a big challenge for the New Zealand economy. On the chart you can see real GDP per hour worked for NZ compared to our major trading partners.
What is very clear from the data is that New Zealand’s economic performance has not been as good as our peers’ since the 1980’s. The reason for that is not a lack of hard work, its just that we don’t produce enough for each hour of work. That explains why our real GDP per capita, and thus our income, has fallen behind that of Australia and the OECD.
NZIER concluded that New Zealand's low productivity is because we don’t use as much capital as many other countries. That could be because the cost of capital in NZ is high relative to labour, causing us to use more labour than capital for each unit of output. It may also be that we have more services in NZ that are not conducive to capital intensification.
To find out more about productivity have a look at:
- Treasury’s productivity page: http://www.treasury.govt.nz/publications/research-policy/tprp
- 2025 Taskforce’s report: http://www.2025taskforce.govt.nz/
- Statistics NZ’s data: http://www.stats.govt.nz/browse_for_stats/economic_indicators/productivity.aspx