The importance of asking why on productivity

A neat article (on Prod Blog here), and corresponding paper, by the Productivity Commission on New Zealand’s productivity performance over the past couple of decades.  This is a descriptive paper, which runs along side the recent productivity symposium, and the upcoming set of papers which will turn up in the Productivity Commissions ‘Productivity Hub‘.

“Productivity” is not a goal – however, understanding why New Zealand’s productivity performance has been lower than other countries, and the way policies and institutions influence this, is very useful.

It helps us ask where we are relative to our “production frontier” and helps us try to understand the costs and benefits associated with policies in more detail.

I especially enjoy the sectoral decompositions that the Productivity Commission uses to indicate that the productivity problems New Zealand seems to be facing are relatively widespread – even if the nature and level of the performance gap is very divergent.  Namely:

At the industry level, the level and growth rates of labour productivity are diverse. Information media & telecommunication and finance & insurance, two ICT-intensive industries, have been strong performers. At the other end of the spectrum, the construction industry and some service industries have detracted from aggregate productivity growth. The 2000s slowdown in productivity growth was broad based, with almost all industries experiencing slower growth, particularly in MFP.

This is undeniably an important area to try to understand, one that corresponds to part of the “problem” in so many policy questions swirling around New Zealand at the moment.  Even when I am questioning whether it is really fair to view this performance as a paradox (given the it may imply to some that this is something we can’t understand and/or that the core of our current explanations is wrong – which are untrue statements), I more than appreciate how important it is – one of my first article substantial articles after a couple of years of work was on the poor labour productivity performance of New Zealand in the “Supersize New Zealand” booklet by the Centre for Independent Studies.

But as Treasury notes with their living standards framework, and as I noted when blogging about my article back in 2009, productivity in of itself if only part of the picture.  By asking “why” like the Productivity Commission is doing we do more than figure out why our productivity performance is low and how to improve it – we may just figure out the more important question of how this question of productivity fits into the full suite of factors that influence the wellbeing, and ability to achieve wellbeing, for New Zealanders, and how policy can improve that!

  • VMC

    Yes – I thought that article was so depressing. Am left wondering whether the NZ experience of depressing real wages allows productive enterprises to continue relying on people when much of the rest of the world relies on technology – at the margin.

    • I think we can go a little far – there has been broad based increases in incomes, and arguably wellbeing, in New Zealand. Furthermore, when we include the increase in the TOT, and account for differences in measuring economic activity between countries, New Zealand’s relative position improves somewhat.

      We shouldn’t confuse trying to make things better with bemoaning how things are – things are actually pretty good!

  • Blair

    The “paradox” concept seems to come from an OECD model which shows NZ should have an income level 20% above the OECD average, based on our policy settings. But when you look at the output of the OECD model (in the symposium summary) it appears to me to have zero predictive power! That says to me we should be looking elsewhere for advice. Why don’t we try asking some Korean economists how they did it?

    I am not sure the focus on MFP is really helpful. It’s hard to measure, we don’t know what it is and we don’t know what causes it. (I think a historical-descriptive approach would be more insightful.)

    When you look at the success stories of Korea, Ireland and Finland, a common factor is that in all three cases it was an investment story. If they hadn’t built all those steelyards and assembly plants, there wouldn’t have been the context for the “learning by doing” to take place. A second common factor was that it was an export story, meaning the key firms were exposed to intense competition. A third common factor is the role of large firms. Large firms have a special role in their ability to execute efficient scale investments, and to link branding and pricing power with insights from product development. These three factors go a long way to explaining the incredibly high productivity in Australian mining. Much of the rest of the Australian economy is oligopolistic and expensive for the consumer, but the regulators seem to be good at creating “just enough” competition between the major firms to keep driving productivity forward.

    • “The “paradox” concept seems to come from an OECD model which shows NZ should have an income level 20% above the OECD average, based on our policy settings”

      Yeah I know, I just didn’t find the terminology, or the model, particularly enlightening – don’t tell anyone 😉

      “When you look at the success stories of Korea, Ireland and Finland, a common factor is that in all three cases it was an investment story.”

      This is where I get a bit more, uncertain. Outside of Ireland GDP per capita is pretty comparable between NZ and the other two countries, and Ireland’s has more of an issue of production being used to fund overseas dividend payments than the rest of us (Note: NZ has a bit of this, but in the figures on GNDI the transfer and TOT effects seem to “cancel out”). In this context, we don’t really look too bad to be honest.

      The competition point, the idea of spillovers, and the idea of scale are indeed all key – very key. Trying to break down what is occurring on the basis of these factors will help us figure out what policy is appropriate – as they require “different” policy responses, as they imply different things about the trade-offs and association with well-being.

      That is why I was keen to term this an “asking why” more than anything else. Will be interesting to look at the papers that come out in the future 🙂