"Productivity isn't everything, but in the long run it is almost everything" wrote Nobel Laureate Paul Krugman some 30 years ago.
Over the past decades, productivity growth has been slowing down in most countries. Especially after the Global Financial Crisis, almost all advanced economies and emerging and developing economies have seen a decrease in productivity.
This is a major problem for the world, as productivity growth is the key driver of per capita income growth, which determines whether people can exit poverty and it is the foundation of wellbeing.
Low productivity growth in Aotearoa New Zealand is an established fact. We are as productive as we were in 2015, while the US, for example, is about 7.5 per cent more productive.
Even worse, capital productivity has decreased over the last two decades, while labour productivity only increased by 1.4 per cent over the same time, according to Statistics NZ data. This record puts Aotearoa New Zealand amongst the slowest growing economies in the OECD.
Many factors cause this slowdown in productivity. These range from lower educational performance, a slowdown in global value chain development, increases in natural disasters and epidemics (e.g. Ebola, SARS, Covid-19), to slower reallocations within and between sectors.
Further, our economy suffers from weak competition, especially in the construction sector, high levels of skill mismatch, low investment into capital, and low levels of expenditure on research and development.
However, there is another reason for why productivity is low: an abundance of labour.
As firms could rely on labour supply to drive economic growth, they had little incentive to become more productive. Since 2000, employment increased from 1.8 million to 2.8 million and labour force participation, especially from females, increased.
Economic growth was not fuelled by productivity, it was driven by an increase in the total volume of hours worked. From 2010 to 2018, this number increased by about 17 per cent in Aotearoa New Zealand according to data from the International Labour Organisation.
However, this trend is going to stop, and we must get used to labour shortages. In the United States, there are currently more than 9 million vacancies and Germany has about 700,000 open vacancies.
Along this line, we see a decline in the number of people of working-age. Birth rates in Aotearoa New Zealand have been falling from 3.2 births per woman in 1970 to 1.7 in 2018. Migration, according to plans by the government, will also be lower in the future.
Things will have to change. Firms will change their approach and rely more heavily on technology. Management structures will change and working arrangements will become more flexible. The last year has shown that digitalisation can improve processes. Jointly with the progress in artificial intelligence, high-skilled jobs can become more productive. In the closer future, robots will not only be used in manufacturing, but also in other industries such as service and construction.
What should the Government do to support this transformation?
For firms to increase productivity they need to increase investment and they require high-skilled workers. Policies need to focus on both margins.
First, the Government needs to reform the tax system. The current tax system heavily favours home ownership thereby distorting savings and investments. Further, the relatively high effective corporate tax rate should be lowered and burdens on Foreign Direct Investments need to be lowered, as both changes increase capital formation.
Second, the Government needs to reform the education system starting from kindergartens, to schools, and universities. Focus on maths skills (complex problem-solving skills) and skills that are needed in the future, e.g. computer programming. Increase the performance standards, which also requires changing the way the entire education sector is funded.
Finally, Aotearoa New Zealand only ranks 22nd on the World Bank's Logistics Performance Index between 2012 and 2018. We need to foster international connections, for example, by improving efficiency in the customs process, lowering barriers of service trade, and by building and maintaining strong diplomatic networks ensuring multilateral co-operation.
If the Government really cares about wellbeing, it needs to urgently develop a long-run strategy to foster productivity and to support firms in becoming more productive.
• Dr Dennis Wesselbaum is a senior lecturer in the Department of Economics at the University of Otago.