Brian Fallow on the economy

Brian Fallow is the Herald's Economics Editor

Brian Fallow: Oz economy still setting the pace

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NZ's growth rate is outstripping Australia's but in productivity terms, the Lucky Country is leading the way

Cathy Freeman outpaces her rivals, as Australia outpaces NZ. Photo / Paul Estcourt
Cathy Freeman outpaces her rivals, as Australia outpaces NZ. Photo / Paul Estcourt

In this election year, we can expect a fair amount of crowing from the Government that New Zealand's economic growth is, for a change, outstripping Australia's.

But growth rates are one thing, levels another.

And research published just before Christmas by the Productivity Commission (an Australian innovation we have belatedly copied) is a reminder of how large and widespread the productivity gap between the two countries is.

The plain fact is that in industry after industry, Australians have a longer stride.

As long as that remains true, they will outpace us and the gap in incomes and living standards - which has encouraged an average net outflow of 26,000 Kiwi migrants a year to Australia over the past 10 years - will only widen.

The report by economist Geoff Mason found that average labour productivity in New Zealand was 62 per cent or 67 per cent of Australian levels, depending on which purchasing power parity measures he used for the exchange rate.

His figures relate, for data quality reasons, to 2009. But given the relentless deteriorating trend in relative productivity over the 40 years before that it is unlikely more up-to-date figures would present a much more cheerful picture.

In most of the 24 market industries looked at, output per hour worked is higher across the Tasman.

That is particularly so for mining, agriculture, most branches of manufacturing (food processing being the main exception), construction, retail and wholesale trade, and financial services.

Between them those sectors account for about 60 per cent of New Zealand's gross domestic product.

That suggests, and Mason found, that the transtasman productivity gap cannot just be explained by differences in the industrial structure of the two economies, that is, by there being a higher proportion of Australians working in industries with comparatively high value added per employee such as mining and financial services.

Indeed in one such sector, utilities (electricity, gas and water), labour productivity is notably higher in New Zealand.

Mason's analysis concluded that about 30 per cent of the productivity gap could be explained by such differences in the composition of the economy. The other 70 per cent reflects differences of performance within the same industries.

Another, related explanation people reach for is New Zealand's comparative "capital shallowness", that is, lower levels of investment per worker in machinery, computers and other assets.

The report concludes that around 39 per cent of the transtasman productivity gap can be laid at that door.

On average, over the 24 industries capital invested per hour worked in New Zealand was just 62 per cent of that in Australia.

It was particularly low in metal product manufacturing (21 per cent of Australian levels), wholesale trade (33 per cent), accommodation and food services (40 per cent) and financial and insurance services (42 per cent).

Capital intensity was higher on this side of the Tasman in utilities and in construction - which makes our notoriously higher building costs all the more annoying.

Mason concluded that around 40 per cent of Australia's lead in capital intensity can be explained by the higher share of its economic output represented by capital-intensive industries such as mining, whereas in New Zealand agriculture has a capital-to-labour ratio similar to that for market industries as a whole.

It follows, of course, that most of the gap in capital intensity is within the same industries.

Mason's report does not speculate on why that might be but other economists have suggested that New Zealand's more deregulated labour market has made it more attractive for firms to substitute workers for capital goods, where that is possible, by making it easier to shed labour during a downturn.

He also considers whether differences in skill levels could explain much of the gap in average labour productivity.

Not really, it would seem. Mason found Australia to have a slight edge in skill levels - measured by the rough proxy of academic qualifications - but concluded it might only explain about 4 per cent of the gap in productivity. That leaves around 57 per cent of the gap in labour productivity attributable to the residual catch-all of "multi-factor productivity", that is, the efficiency with which inputs of labour and capital are used.

Multi-factor productivity picks up the effects of hard-to-measure capital investments in innovation, Mason says, as well as a range of other influences on performance such as differences in scale of production or in the size and diversity of urban areas.

At this point economy-wide generalisations are unlikely to be helpful. Explanations, and remedies, for underperformance need to be sought at the industry or firm levels.

Why, for instance, is multi-factor productivity in the New Zealand construction sector just 37 per cent of Australian levels?

Why is it only half Australian levels in mining and financial services?

Why were the primary industries (agriculture, forestry and fishing) 18 per cent more efficient at using labour and capital than their Australian counterparts in 1997 but 7 per cent less efficient by 2010?

What factors explain our chronically lower rates of capital expenditure per worker? Scale? Tax? The cost of capital?

Unless we can come up with decent answers to such questions we had better hope the Australians continue to regard New Zealanders as, on the whole, desirable immigrants.

- NZ Herald

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