What are we asking with productivity in NZ?

Danyl posted about the recent Productivity Commission paper on Australia vs NZ productivity differences recently.  If you ignore the politics and conspiracy (the timing of the paper was well known and they were asking people to write about it, hence why I wrote this at the time) he asks a good questions, why have we seen relative productivity drop up?

I gave a fairly casual response in the comments – which was ignored as other people busily made things up 😉 :

Fair question. That was the goal of the productivity symposium, to figure out what underlying changes were the cause of the decline in relative productivity.


The lack of scale in NZ is a big issue, as is distance from market. These issues have become more and more important over the last 40 years. When we look at policy, we can’t forget that there has been a big push by both parties to increase participation and hours worked – which lowers average productivity. Whether getting GDP growth from people working longer is “appropriate” is an open question IMO.

I’d also note that the comparability of pre-1987 and post-1986 GDP data is a bit questionable given the measurement changes – but if policy makers are willing to compare them, those are the stylized facts we have to work with.

Another point is the terms of trade – the productivity change excludes the recent increase in return (and also the relative drop in return between the 1950s-1990s) associated with the terms of trade. If our interest is relative income differences this is a pretty important shift as well. Yes, Australia has seen a big TOT increase (bigger in fact), but that simply means we are comparing ourselves to one of the richest countries on earth :)

The key point is to have a look at what the Productivity Commission has actually been doing, as they have been trying to work out those very questions!

Now, for Danyl’s point that it was all Rogernomics fault – that would be a more interesting hypothesis if we could identify the policies we are looking at, rather than just a blanket claim.  In fact, that is something I am very interested in – what exactly was the impact of different policies.

When the Productivity Symposium discussed New Zealand’s relative productivity performance it was called a “paradox”.  This was because our institutional settings (which are largely the result of ‘Rogernomics’ and what followed I guess) are very good on the basis of cross-country empirical evidence.  That is where an external observer from the OECD (Alain de Serres) was coming from.

Given that stylized fact, we actually needed to think more carefully about “why” productivity dropped off – without arbitrarily blaming policy.  Scale and distance to market are two of the big things.

Now what this means for policy is HARD.  And what this means for the future is UNCLEAR – NZ has a comparative advantage in goods whose relative price is rising (food) and the increasing amount of things going online will reduce the penalty to distance … but increase the penalty to scale!

The Productivity Commission is going to release a lot of research about these issues over the coming years.  If Danyl, and the gang of commentators making empirically false claims about NZ and Australia in his comments, actually care about New Zealander’s welfare and the productivity issue they would do well to reading some of it before passing judgement on it.  I don’t expect this to happen – as generally people both think they know more than they really do about social science (a version of the Dunning-Kruger effect), and they think social science is “easy”, hence I’m not sure why I’m even bothering with this post.  I guess that I’m excited to see people potentially motivated to discuss and think about social issues, and I always hold out some hope people will try to do this while leaving their “politics and preconceptions” at the door.

Note:  I was nervous about the PC’s framing of this as a paradox – thinking it would be unclear, and lead to people who “haven’t read the papers”, as Danyl states in his post, to make inferences that were unfounded.  I stated that directly in the comments to this post – where I was trying to hint at my concern.

  • Interesting post. Of course, scale and distance are the standard explanations for NZ’s low income, given the policy settings. It’s more difficult to explain the recent underperformance relative to Australia when those factors haven’t really changed.

    There’s a similar problem in the UK at the moment where people are unsure how to explain the recent fall in productivity. Of course, it turns out that everyone’s personal hobby horse is the answer to the puzzle. Really, it just shows how reluctant most people are to say that they don’t know.

    • NolanNZ

      Yar, the recession years are an interesting different case – is it hysteresis, is it a temporary shortfall, has there been a fundamental reallocation of the return on different products (and the interest rate).

      My impression is that question is even bigger in the UK – but when it comes to thinking about the TOT it is pretty important here as well.

      We likely won’t know until well after it is over!

      • Definitely a huge question and I agree that it will be years before we figure it out. Unfortunately, there is money to be made coming up with answers now!

        • NolanNZ

          I think there is value is some heuristics given issues of knowledge, such as incrementalism and harm minimisation.

          But for the big stuff, the time building understanding is important. I have no doubt in public policy classes they have a far better grasp on this trade-off than I do!

  • The Distributist

    Productivity should actually be dropping off as we become more efficient and create and work smarter. The drive to increase productivity without showing any real and tangible benefits to all of society equitably is counter productive.