Productivity compares the amount of goods and services produced (output) with the amount of inputs used to produce them.
Since the Productivity Commission was set up in 2011, annual productivity growth has averaged at just 0.2% – one of the worst in the OECD.
In 2023, New Zealand experienced declines across key metrics: labour productivity dropped by 0.9%, multifactor productivity (which includes labour, capital, energy, materials and purchased services) fell by 2.2% and capital productivity by 3.8%.
There has also been a sharp decline in small business productivity, with a 19% drop from its peak in November 2022.
Productivity is not only an abstract concern. It directly impacts income growth, exacerbates inequality and hampers overall welfare.
The productivity puzzle
But New Zealand’s stagnation doesn’t have to be inevitable. There are tangible approaches the government can take to boost the country’s productivity. Here’s how.
Human capital
There are at least two ways New Zealand can improve human capital – the sum total of the skills and education a worker has to do their job.
In the short-term, the government needs to allow more high-skilled migrants to enter the country. This type of migration can reduce skill mismatch and create knowledge spillovers. That is, migrants bring valuable knowledge, expertise and innovative ideas from their home countries, which can spread to local firms, industries, or individuals via collaboration and competition.
Over the long-term, investing in education and cultivating STEM and digital skills will be crucial for combating the country’s productivity stagnation and future-proofing the workforce.
Technology
Technological advancement is a key driver of progress, yet its integration requires careful planning.
Artificial intelligence (AI), in particular, holds immense potential to boost productivity. One study found generative AI, for example, could boost a worker’s performance by almost 40%.
But the widespread use of AI demands not only technological infrastructure but also a skilled workforce and the ability of organisations to adapt.
Regulation
Regulation, reducing adjustment costs and barriers, taxation, and industrial policy are interrelated elements of the productivity puzzle.
But regulation, in particular, must be balanced carefully. The government needs to ensure worker and environmental safety while also encouraging innovation.
The government also needs to encourage the development of new businesses – a key factor to boost productivity. To do this, policy makers need to reduce entry and exit costs of doing business.
Industrial policies
Industrial policies, such as subsidies or tax incentives, if appropriately targeted, can also increase productivity by supporting innovative firms rather than stifling competition. An example is to provide research and development tax credits to encourage innovation in high-tech industries.
Industrial policies can also reduce productivity growth, particularly when they slow down the shift of elements such as labour and capital from less productive or declining sectors to more productive or growing sectors.
To be effective in addressing productivity, industrial policies need to be targeted at the most competitive sectors. They also need to apply to a broad number of firms with the purpose of benefiting the most competitive in each sector.
Tax policy
Tax policy is another important driver which needs to be carefully designed.
For example, if the tax policy subsidises the use of equipment while taxing the employment of labour, policy makers will have increased the incentives for automation and reduced incentives to create new ideas.
This would put a damper on increasing productivity. Instead, policy makers could look at an automation tax, applicable to technologies which automate tasks above a certain level.
Research and development
Despite a 17% increase in spending on research and development (R&D) in New Zealand last year, one study found it is not that effective for increasing productivity. Rather than supporting widespread innovation, poorly targeted R&D funding can prop up otherwise unsustainable businesses.
Instead, the government needs to tax all firms uniformly, encouraging less innovative firms to exit. This would free up resources for more innovative firms to intensify their R&D efforts. Implementing targeted taxes could further support this selective process.
Creating clusters
Productivity growth is also influenced by where people work and the density of networks. Research has found tech clusters like Silicon Valley in the United States can play an important role in innovation, business competitiveness, and economic performance.
This is not a new idea. As far back as 1991, manufacturing clusters were touted as the key to improving New Zealand’s export competitiveness. But in 2018, a report found the cluster theory had failed to take hold – in large part due to infrastructure issues and the spread of businesses across the country.
There has also been a sharp decline in small business productivity, with a 19% drop from its peak in November 2022.
Productivity is not only an abstract concern. It directly impacts income growth, exacerbates inequality and hampers overall welfare.
The productivity puzzle
But New Zealand’s stagnation doesn’t have to be inevitable. There are tangible approaches the government can take to boost the country’s productivity. Here’s how.
Human capital
There are at least two ways New Zealand can improve human capital – the sum total of the skills and education a worker has to do their job.
In the short-term, the government needs to allow more high-skilled migrants to enter the country. This type of migration can reduce skill mismatch and create knowledge spillovers. That is, migrants bring valuable knowledge, expertise and innovative ideas from their home countries, which can spread to local firms, industries, or individuals via collaboration and competition.
Over the long-term, investing in education and cultivating STEM and digital skills will be crucial for combating the country’s productivity stagnation and future-proofing the workforce.
Technology
Technological advancement is a key driver of progress, yet its integration requires careful planning.
Artificial intelligence (AI), in particular, holds immense potential to boost productivity. One study found generative AI, for example, could boost a worker’s performance by almost 40%.
But the widespread use of AI demands not only technological infrastructure but also a skilled workforce and the ability of organisations to adapt.
Regulation
Regulation, reducing adjustment costs and barriers, taxation, and industrial policy are interrelated elements of the productivity puzzle.
But regulation, in particular, must be balanced carefully. The government needs to ensure worker and environmental safety while also encouraging innovation.
The government also needs to encourage the development of new businesses – a key factor to boost productivity. To do this, policy makers need to reduce entry and exit costs of doing business.
Industrial policies
Industrial policies, such as subsidies or tax incentives, if appropriately targeted, can also increase productivity by supporting innovative firms rather than stifling competition. An example is to provide research and development tax credits to encourage innovation in high-tech industries.
Industrial policies can also reduce productivity growth, particularly when they slow down the shift of elements such as labour and capital from less productive or declining sectors to more productive or growing sectors.
To be effective in addressing productivity, industrial policies need to be targeted at the most competitive sectors. They also need to apply to a broad number of firms with the purpose of benefiting the most competitive in each sector.
Tax policy
Tax policy is another important driver which needs to be carefully designed.
For example, if the tax policy subsidises the use of equipment while taxing the employment of labour, policy makers will have increased the incentives for automation and reduced incentives to create new ideas.
This would put a damper on increasing productivity. Instead, policy makers could look at an automation tax, applicable to technologies which automate tasks above a certain level.
Research and development
Despite a 17% increase in spending on research and development (R&D) in New Zealand last year, one study found it is not that effective for increasing productivity. Rather than supporting widespread innovation, poorly targeted R&D funding can prop up otherwise unsustainable businesses.
Instead, the government needs to tax all firms uniformly, encouraging less innovative firms to exit. This would free up resources for more innovative firms to intensify their R&D efforts. Implementing targeted taxes could further support this selective process.
Creating clusters
Productivity growth is also influenced by where people work and the density of networks. Research has found tech clusters like Silicon Valley in the United States can play an important role in innovation, business competitiveness, and economic performance.
This is not a new idea. As far back as 1991, manufacturing clusters were touted as the key to improving New Zealand’s export competitiveness. But in 2018, a report found the cluster theory had failed to take hold – in large part due to infrastructure issues and the spread of businesses across the country.
Thinking long-term on productivity
Despite recognising the importance of these factors, New Zealand has faced persistent challenges in implementing comprehensive reforms.
In part, this is due to institutional inertia, lack of expertise among government officials in integrating research into policy formulation, fragmented policy approaches across different sectors, insufficient funding and a historical reliance on traditional industries.
If we really want to address our lagging productivity levels, an integrated approach is needed.
Improving labour market flexibility, infrastructure, and housing regulations enhances mobility and efficiency, unlocking potential across industries.
Furthermore, trade liberalisation policies aimed at increasing foreign direct investment and cross-border mergers and acquisitions can increase productivity.
By embracing innovation, up-skilling our workforce and implementing targeted policy interventions, New Zealand can chart a path towards a more productive and prosperous future for all.
Dennis is a Senior Lecturer in Economics at the University of Otago, the Vice President of the New Zealand Association of Economists, Editor-in-Chief of New Zealand Economic Papers and Associate Director of the University of Otago’s Economics PhD Programme. This article was first published HERE
8 comments:
Oh dear Dennis. I love your enthusiasm but your attempt to outline practical policies to improve productivity is, frankly, academic waffle!
“…allow more high skilled migrants…”. If only! We already have such policies but they don’t want to come. The issue is that we import so many low skilled people. Then you say in relation to technology “…its integration needs careful planning…”. Planning by who? Govt I guess you mean but heaven forbid the Govt get involved in anything like integrating technology into the private sector. Govt direction is a major theme that goes through your whole document. Even if Govt could pick winners in terms of industries or enterprises, try and write policies that give effect to such direction. How can Govt possibly write policies to “…target the most competitive sectors…” or design an “automation tax…”. You mention Govt should “…reduce entry and exit costs of doing business…” How, what? Nice words but NZ already has very easy business start up and exit processes. You mention creating clusters. Please don’t let Govt get into this! They’re bad enough at trying to run their own activities without bungling into attempting to start new industries!
I always cringe when I see an article relating to productivity. It’s inevitably someone who wants to appear to be profound and knowledgeable. My view is that productivity is not something Govt can fix. Govt can only impact it over the very long term by having sound economic, social and educational policies combined with a stable political environment. Unfortunately many of these factors have been lacking over the last few years…
Dennis, Would you consider that productivity in NZ is more often than not created by NZers skilled and diligent , resolute against the plethora of issues from the governmental and academic malaise . A high percentage of NZ productivity is directly related to export and construction in all forms turning nature and simple products into valuable assets.
The productivity of our education and health sector is enormous and critical, Our vital tourism industry turning hospitality , scenary and NZ food production into high value cashflow , right here in NZ
Perhaps low productivity is the sole domain of salaried and desk bound persons who cannot look at a days toil with any indication of what they achieved , and the younger unemployed and benefit brigade who systematically bring down productivity through sheer negligence and insolence.
Productivity is NOT the causation or issue for most NZers .
Agree.
No quick fix in this crucial area - requires years of stable and competent government.
This is something the radical Left does not even grasp.
The only long term planning going on it seems, is politicians financial planning and how to stay in the big club.
The constant seeking of increased production puzzles me. It includes all those gross and idle security guards in libraries, govt departments, cone shepherds, teachers of te reo etc. More car crashes increase production. What does productivity increase involve? More cones watched per hour employed? Or per dollar paid out? Or more inefficiency inducing te reo taught per dollar spent?
The merit of increased production and productivity would seem to be very dependant on the particular products.
There's no hope for anything requiring 'a long-term plan from politicians' let alone the multi faceted productivity issue. Whatever chance was had to get NZ-Inc back on course in this area has simply passed us by. Government is saddled and hamstrung with enormous debt. Government departments, local government, and so-called academia are bloated with troughers and chancers. It seems our best and brightest are leaving while lower-skilled workers arrive in droves. Public education and universities have been a disgrace for two decades at least, yet still somehow to be trending worse. Property prices are ridiculously high, and we are completely hamstrung by ridiculous and fanciful climate and ethic policies. NZ is thus simply not an attractive destination for II (Immigration Intelligence), and AI tools are already available globally. Research and development grants here come with caveats around the Treaty and/or Climate Change. Our major cities are each and every one a disgraceful product of decades-long mismanagement. Add to all of this an increasingly shaky World, both politically and economically. There might have been some hope for New Zealand decades ago, but none I would say for the broken Aotearoa of today.
Hard to take anyone seriously when they propose we encourage high skilled immigration. As Reggie pointed out, these people are not interested in coming here, we get those not good enough for even Australia, let alone America or Europe.
Blind hope is not a plan, but neither is this article.
Read with great anticipation.
Reggie is on to it.
How about subsidies for the farmers? Now there's a great idea. The only productive sector in New Zealand.
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