On Labour Productivity in New Zealand

1 September 2017

In the first TV Leader’s Debate in the run-up to the September election, Bill English made a claim that "Productivity in New Zealand has grown pretty well". We think it is important that our members are presented with what these days we call ‘an alternative view of the facts’.

Below please find the views from three different sources. The views and opinions presented here aren’t necessarily our own, but they will help with getting a realistic assessment of where economic development in New Zealand, or the lack of it, is at.

1) Michael Reddell, ex RBNZ economist

https://croakingcassandra.com/2017/09/01/productivity-wages-and-other-debate-thoughts/

Productivity, wages, and other debate thoughts

Like many, I watched the major party leaders’ debate last night.   It was civil and courteous, playing the issues rather than the person.  So far, so good.  But sadly neither leader seemed to offer anything very substantial on fixing our pressing economic challenges, or even show any real sign of understanding the issues.     At a time when the unemployment is still well above what it was a decade ago, when the underutilisation rate for women is still almost 15 per cent…..

…when there has been no productivity growth for five years, and when the export share of GDP has been shrinking, the Leader of the Opposition seemed content to concede that the economy was in good shape.  “Relentlessly positive”  I suppose.

Not that the Prime Minister was having a bar of any concerns about productivity.   As Newsroom put it:  “English dismissed outright a report from sharebroker J B Were which concluded the country had a productivity recession. “They were wrong. “They are way over-stating the case. Productivity in New Zealand has been growing pretty well….” Bill English said

Well, you can read the J B Were piece for yourself.  I did when it came out, and did again this morning.   It made many of the points I’ve been making here for some time.    There isn’t anything in the economic side of the report I’d materially disagree with.  The data –  as officially reported by Statistics New Zealand –  speak for themselves on the productivity underperformance, particularly over the last five years.

Not only have we had no labour productivity growth for five years, but our near-neighbour Australia –  which the government was once willing to talk about catching up to – has gone on generating continuing labour productivity gains.    Yes, there has been a productivity growth slowdown in much of the advanced world, dating back to around 2005.    But our additional and more recent slowdown –  well, dead stop really – looks like something different, and probably directly attributable to New Zealand specific factors.   Things New Zealand governments have responsibility for responding to.

I’ve also shown this chart before –  labour productivity for the better-measured parts of the economy, with SNZ’s attempt to adjust for changing labour quality. It is annual data, and only available with a bit of lag.

Again, no labour productivity growth at all in the last few years.

And what about multi-factor productivity growth?  It doesn’t get as much attention, partly because the data are only annual, and the construction of these estimates involves quite a few assumptions.   Nonetheless, here is the SNZ estimate for the (better) measured bulk of the economy.

The series is cyclical –  if machines are idle in a recession estimated MFP falls and then recovers as utilisation picks up –  but looking through the recession, the estimated index level of MFP is the same now as it was 10 years previously.  No growth.

But somehow the Prime Minister thinks “productivity in New Zealand has been growing pretty well”.    One for the Tui billboards I’d have thought.

And all that is without even getting into the lamentable failure of governments led by both main parties to do anything about reversing the precipitous decline in levels of productivity in New Zealand relative to those in other advanced economies.    Lifts in the terms of trade –  experienced under both this government and its predecessor –  are of course welcome, but they can’t be a credible medium-term substitute for productivity growth.

From the other side, the Leader of the Opposition’s suggestion that data on real wage growth didn’t matter, and what really mattered was how people felt, seemed almost equally risible.  In terms of attracting votes, perhaps she is right.   But when the Prime Minister pointed out that real wages have been rising, he was of course correct.  I’m not sure why people put so much weight on the QES measure of hourly wage inflation.  It has well-known problems (for these purposes) and is hugely volatile.   Here is a chart showing wage inflation for the private sector according to (a) the QES, and (b) the Labour Cost Index, analytical unadjusted series.

No economic analyst thinks wage inflation is anything like as volatile as the blue line –  in fact, wage stickiness, and persistence in wage-setting patterns is one of the features of modern market economies.

And here is the chart I ran last week, comparing real private sector wage inflation (the orange line above, adjusted for the sectoral core measure of CPI inflation) with productivity growth.

Real wage inflation now is lower than it was in the pre-2008 boom years, but it is running well ahead of productivity growth (however one lags or transforms it).    From here, lifting productivity growth is the only way real wage inflation is going to increase, and such increases in economywide productivity really should be recognised for what they are –  a well overdue imperative.

Sadly, the Prime Minister seems to want to bluff his way through, simply pretending there isn’t an issue, with no real answers as to how to  (for example) lift the outward-orientation (exports and imports) of the New Zealand economy, and refusing to face the fact that productivity growth has vanished since the latest new large net migration inflow began in 2013.  It won’t be the only reason why productivity growth has been vanished, but it is unlikely that there is no connection at all (and certainly the much-vaunted official and political claims that high non-citizen immigration flows are helping lift productivity look emptier than ever).

And the Opposition leader is no better.    When Ardern was asked last night who was going to build the houses if immigration was cut back, my 14 year old son turned to me and asked “why doesn’t she just say that if there are fewer migrants fewer houses would need to be built”.   Sadly, I could only point out that Labour’s approach to immigration actually isn’t materially different to the National Party’s.  The net inflow might be a lower in the first year, but in the essentials they are two sides of the same coin.  Here is what I wrote when Labour released their policy in June.

Overall, some interesting steps, some of which are genuinely in the right direction.  But, like the government, Labour is still in the thrall of the “big New Zealand” mentality, and its immigration policy –  like the government’s – remain this generation’s version of Think Big.  And it is just as damaging.    The policy doesn’t face up to the symptoms of our longer-term economic underperformance –  the feeble productivity growth, the persistently high real interest and exchange rates, the failure to see market-led exports growing as a share of GDP, and the constraints of extreme distance.  None of those suggest it makes any sense to keep running one here of the large non-citizen immigration programmes anywhere in the world, pulling in lots of new people year after year, even as decade after decade we drift slowly further behind other advanced countries, and se the opportunities for our own very able people deteriorate.

And what is Labour’s solution to the economic challenges?   There is lots of talk about more skills training, even though the OECD surveys suggest that our people are already among the most skilled in any OECD country.       Beyond that, Jacinda Ardern was invoking the OECD –  “they’ve told us what we need to do” to lift productivity and economic performance.

Well, this table is from the latest OECD Economic Survey of New Zealand, released a few months ago.  On the left hand side are the “main findings” and on the right the “key recommendations”.

I don’t wildly disagree with most of those recommendations –  sceptical as I am of R&D subsidies.     But (a) with the exception of R&D subsidies, does this look at all like Labour Party economic policy  (has there been talk of the tax working group possibly proposing lower capital taxes?), and (b) more importantly, does anyone really think that these items, even taken together, are remotely enough to materially reverse the decades long decline in our relative productivity performance, that the OECD themselves highlighted?

Sadly, there was all too much of “let’s pretend” to the debate, and nothing to suggest that either side is really willing to suggest it is serious about engaging with, and delivering solutions to, the decades of underperformance, presenting now in five years of no productivity growth at all, and an economy increasingly skewed inwards rather than outwards.

 

2) This is what Bernard Hickey wrote in Newsroom today:

Fact-checking Bill on productivity

Later on during a discussion about the economy, English was challenged about a recent JB Were report from economist Bernard Doyle about productivity, which showed a recession over the last four years.

"JB Were are just wrong. They are way over-stating the case," he said.  Ardern said productivity had had flat lined at best and she wanted to invest in people and skills through education to improve productivity.

Here are the charts published by Doyle showing what has happened to GDP overall, GDP per person and GDP per hour worked.  This one shows GDP per hour worked, a typical and broad measure of productivity, being negative for the last three years.

This one shows the cumulative effect of that productivity recession on an indexed chart that includes how total GDP grew with the help of a net migration boom and a rise in labour force participation, rather than a rise in output per hour worked.

The OECD also made the point in its June report on New Zealand that New Zealand's productivity was lagging, and it made a series of recommendations about how to improve it.

1. Population-weighted average for the top 17 OECD countries for labour productivity, calculated using 2010 purchasing power parity exchange rates.

Source: OECD (2017), Productivity database; OECD (2017), Economic Policy Reforms: Going for Growth 2017

The Government's own Productivity Commission, which English set up, reported in November last year in an 86 page report that New Zealand's productivity growth was still comparatively low.

As recently as August 7, Treasury reported its own analysis of various measures of labour productivity, including one measure using the Household Labour Force Survey (HLFS) showing that labour productivity growth was negative through 2016 and was down 3.3 percent in the year to March.

Even using an adjusted total hours worked series, Treasury found: "Labour productivity growth was estimated to still be negative in the year to March 2017 (-0.4%) and average productivity growth over the past four March years was essentially flat (-0.03%)."

"Using the QES (quarterly employment survey) weekly paid hours series as the hours component of labour productivity gives similar results (-0.2% growth in the year to March 2017 and slightly negative labour productivity growth on average over the past four years), suggesting the adjusted HLFS measure is a reasonable approximation."

Here's Treasury's chart from that paper:

In Parliamentary Question Time on August 15, Finance Minister Steven Joyce cited OECD figures in response to challenges from Grant Robertson using Doyle's and other figures.

Joyce said OECD figures showed New Zealand's GDP per hour worked had risen 9.6 percent since 2008, which was faster than Canada, Britain, Europe, Great Britain and the G7.

Joyce's figures include the natural bounce-back in productivity that happens during a recession when many businesses lay off workers. Over the last four years, productivity is flat, at best, as Ardern said in the debate.

English's outright denial of a productivity problem in the debate was Trumpian in its brazenness and disappointing from a former Finance Minister who knows that productivity improvements are ultimately the only way New Zealanders get richer in the long run.

New Zealand's economy has grown faster than others in the last four years, but only because of a surge in its population from migration and an increase in the labour force participation rate. New Zealand's economy grew because more people arrived, more people worked and they worked longer hours. They didn't work smarter.

 

3) And, finally, here’s the link to Bernard Doyle’s JB Were Report of August 10, 2017: Economic Update: Working Harder, not Smarter

https://www.jbwere.co.nz/assets/Uploads/1708-Working-harder.pdf

Well worth reading, we suggest!