Productivity in the UK and NZ

I see that Patrick Nolan has an article in Public Finance talking about UK and New Zealand productivity.  Go read it, but come back here to comment as they don’t seem to have a comment system.

As we are a NZ audience, I’ll quote this bit:

While New Zealand faces different challenges, its experience can throw light on the UK’s situation. OECD research recently published by the New Zealand Productivity Commission has shown that the country has good resources – investment in physical capital and average years of schooling are broadly consistent with other countries – and policy settings. It is one of the easiest countries in the world in which to set up a business and its tax and regulation regimes are often seen as world class.

Indeed, the OECD estimates that New Zealand should have GDP per capita 20% above the OECD average. But its productivity performance means it is 20% below. In short, New Zealand poses a real challenge for standard prescriptions for what countries should do to lift their productivity performance.

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  • Michael Reddell

    It is all very well to talk of a UK productivity puzzle, but over a slightly longer-term horizon it is worth bearing in mind that the UK has had one of the best productivity performances of any major economy over the last 25 years, and NZ has been one of the worst of all the advanced economies. Since 1990, Conference Board numbers show UK productivity growth (real GDP per hour worked) having outstripped all the other G7 countries – even taking into account the last few mediocre years. NZ, by contrast, beat only Italy over the same period. So over recent decades the UK has been converging on the higher productivity countries – even if there is still a levels gap – while NZ has started low and drifted further behind.

    • This is true. However, it was an article for a UK audience, stating that NZ had long had productivity problems and thinking about NZ could help the UK consider what was going on there – given that their “job rich” recovery was a genuine surprise to them!

      • Michael Reddell

        It felt a bit like a marketing exercise for the Productivity Commission. The article concludes:
        Yet, the UK’s recent productivity performance raises more questions than answers. This is why insights from New Zealand can be valuable. This country’s recent experience provides important clues on how to solve the UK’s productivity puzzle.
        And yet, since NZ’s productivity performance has show no signs of sustainably improving, and the NZPC appears as yet to have no overall model for thinking about how that failure could be rectified (as distinct from various small, often no doubt useful, things at the margin), it is not clear what insights the recent NZ experience offers in thinking about the UK. Again, taking the slightly longer view, and whether looking at labour productivity or TFP, one might reasonably think any flow of lessons should run in the opposite direction.

        • I’m sure it is a marketing exercise. But I’d say that thinking about frameworks regarding what causes changes in productivity is a useful exercise for looking into a countries productivity performance – surely that is what the conclusion was implying?

        • Blair

          Is the UK experience that much of a puzzle though? I would have thought it was exactly what one might have expected given the impact of the GFC on bank profitability and given the very substantial fall in oil output. The ONS even did a study announcing that contraction of these two industries alone explain most of the fall in productivity. (What is perhaps notable is that the BOE did a better job than the ECB of getting people back into other jobs, even if they were less “productive”). That’s one “framework” for you. And it seems to me that recent governments in NZ have drawn the “lesson” that jobs in finance & resources pay very well.

          • That’s part of the question – is it just a drop in TFP due to a shock in the financial sector, or even just a sector specific drop in productivity? My impression was that this was the initial blame taker, but as time has gone on the evidence has moved against this – certainly not my area of expertise, so it would be interesting to hear

            • Blair

              The charts in here are quite interesting:
              Interesting the allocation effect was only slightly negative, and then turned very positive. Interesting that the decline in financial services doesn’t show up until 2009, even though Lehman UK ceased to exist in Q3 2008. Sadly I don’t have time to dig deeper into it.

              • FS is a part of it but only around a quarter of the net decline, relative to trend. Another popular explanation is the reduction in capital intensity, but that explains even less. Interesting analysis by the BoE shows that most of the fall in productivity is the effect of intra-firm reductions in TFP. But, essentially, we have no idea why it’s happened and all of the plausible mechanisms account for only a small portion of the fall. So we have an idea of what is happening but not why, which makes macro forecasting exceptionally difficult in the UK at the moment!

                Of course, the UK’s 1973 recession also yielded flat productivity for a decade afterwards before normal service resumed and that’s never been adequately explained. I have no idea if it’s analogous because obviously the inflation problem made it a very different recession, but it suggests that we have a long-standing gap in our understanding of productivity. Which won’t be news to any economists, I don’t think!

        • Blair

          Interesting Q is whether the Reddell Hypothesis offers any lessons for UK. Maybe it does. When cable was at 2.07 i-bank economists were saying this is crazy, way above fair value, but it didn’t feel like a bad thing because the City was booming and papering over the cracks. But meanwhile you had very high low-skill immigration, emigration of native born, deindustrialisation and very low investment, and CAD roughly in balance. (The Town and Country Planning Act 1947, which limited housing supply, was also an important driver in this process). And generally higher interest rates in UK than EZ or US in the years leading up to GFC. So, somewhat different fact set but also many features in common.

          • Although, remember that the overvaluation over the medium term requires some form of imperfection in capital flows – sure that could hold for NZ, but for the UK that is more implausible.

          • Michael Reddell

            I suspect there is something to that story. It is certainly interesting that the period of UK outperformance was in the 1990s – before the surge in migration to the UK – rather than in the period since 2000. Indeed, the whole post WW2 revival of Britain (per capita income, producitivity) was probably helped by very weak population growth, limiting pressures on non-tradables and the real exchange rate.

  • Blair

    The NZ Productivity Commission has some useful stuff out today about productivity. They talk about lack of competition and ICT investment, which is great. But if you want concrete analysis of why specific industries like taxis, car dealerships or retail appear to be so uncompetitive compared to overseas, you will be disappointed. (This may be partly because our Commerce Commission doesn’t do “market studies”, which they discuss in the report). They also have 3 short paras on land use regulation and the RMA, but don’t make any recommendation. And of course they don’t discuss Michael Reddell’s theories about productivity!

    • Productivity is one measure that is an outcome from a number of processes, and in itself is one factor that is related to something we genuinely care about – welfare (and related to the other factors that influence this as well). Having a lot of groups framing the issue in different ways and investigating issues is useful – not just for “finding a cause”, but for trying to figure out why it may matter, what the failure may be, and who the winners and losers involved are.

      Like I’ve said in the past, there may well be plus sides to the factors holding down our productivity – it may be a product of how egalitarian NZ is (even though society here has a weird vision that we are not egalitarian), it may be a product of the inclusive growth that has given us very high employment rates. Who knows! But when framed that way, it starts to sound like a policy trade-off we need to consider, instead of a knot we can untie for free goodies 😉