A blessing in our low productivity past

New Zealand’s lowlabour productivity growth in the recent past is often identified as aproblem.   But if we had enjoyed stronger productivity growth our society maylook quite different today, and not necessarily better.

Labour productivity measures the value of finalgoods and services (or gross domestic product) produced in the economy for eachhour worked.   Low labour productivity growth means that we are producing littlemore for each hour’s work today than ten or fifteen years ago.

Labour productivity growth varies from yearto year but on average during both the 1990s and 2000s it has averaged close to1% per annum in New Zealand.  In contrast, the OECD average was about 2.2%.

There are multiple reasons for our lowproductivity growth.   Perhaps the most important is that employers have notequipped their workers with new machinery or technology to the extent thatemployers in other OECD countries have.  

We know that our economy has performed wellin the recent past and that the total amount of goods and services produced hasgrown strongly.   Without new machinery or technology it follows that a hugeincrease in the number of hours worked was required.   This in turn has requiredemployers to bring on vast extra numbers of employees.   And herein lies thecrux – economic growth in New Zealand over the past fifteen years has been labour-rich.   Becauseemployers have opted not to use more machinery or technology and to foregolabour productivity growth we have enjoyed strong employment growth.

This labour-rich, low-productivity growthwas necessary as New Zealand had a surplus of labour for most of the 1990s,largely the result of poorly skilled or inappropriately skilled people nolonger being able to find jobs in previously protected industries such as carand television assembly.   Unemployment averaged almost 8% during that decadeand it peaked at over 11% early in 1992. Due to labour rich growth theunemployment rate has been on a downward trend since 1992.   With unemploymentcurrently at 3.6%, an historic low, the economy is regarded as being in fullemployment.   Most of the unemployed are between jobs – they may have left a jobvoluntarily and are taking their time to find something suitable.   Thisso-called ‘frictional unemployment’ will always be with us and is not a sourceof concern at is largely based on choice.  

Our labour rich growth has not just moppedup unemployment.   It has created opportunities in the labour market for tens ofthousands of people who would not have considered entering the labour market ifconditions weren’t so attractive.   Otherwise stay-at-home mums have the choiceto take up part-time employment and supplement the household coffers, pensionershave the choice to work and top up their superannuation, and students can keepdown their loans down with a bit of employment on the side.

The attainment of full employment needs tobe one of the highest priorities for any government as the social consequencesof unemployment are substantial.   Unemployment creates a culture of dependency,feelings of worthlessness and despair.   Children that grow up in householdswhere the parents stay on benefits in the long term will probably do the samein their adulthood.   On the other hand work builds esteem, it creates socialinclusion and it offers hope.

Many of the most at-risk sectors of societyhave benefitted the most from strong employment growth.   The number oflong-term unemployed has dropped from a peak of 91,000 in 1992 and an averageof more than 50,000 during the 1990s to about 13,000 currently.   In the earlynineties more than a quarter of Maori were unemployed.   Today the rate is downto a still-too-high-but-more-acceptable 7.6%.   The number of older workers (55years and older) in employment has climbed from around 140,000 to almost400,000 over the past fifteen years (though this was also encouraged by thechange in the age of eligibility for New Zealand Superannuation).

A consequence of labour rich economicgrowth is that the proportion of the population that is not working and isdependent on those that are working has declined rapidly.   In 1992 nearly 58%of the population was not in employment.   Currently the rate has dropped wellbelow 50%, meaning that there is less than one person dependent on each personin employment.  

New Zealand’sgrowth path contrasts starkly with that of the country currently hosting theRugby World Cup.   France hasenjoyed spectacular labour productivity growth since 1970, averaging 2.7% perannum.   This has occurred because businesses have responded to an overregulated labour market that impedes efficient hiring and firing, by investingin capital and technology rather than using labour and creating jobs.   As aconsequence France has beenburdened with persistently high unemployment.   And this has come with enormoussocial costs.   A key element behind the Paris riots of 2005 was high unemployment and social exclusion of its NorthAfrican population.  

New Zealand has nowachieved full employment and provided opportunities for just about everybodywho wants to work.   But in the future employers will not be able to rely onfinding more employees if they wish to increase production as the supply of newlabour is running out.   Over the next ten years the labour force will grow byless than 1% per annum and after 2020 it will cease to grow at all.   If we wantto expand our economy in the future it will need to come from improved labourproductivity rather than increased use of labour.

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