A blessing in our low productivity past
Fri 14 Sep 2007 by Andrew Whiteford.

New Zealand’s low labour productivity growth in the recent past is often identified as a problem.   But if we had enjoyed stronger productivity growth our society may look quite different today, and not necessarily better.

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

Labour productivity growth varies from year to year but on average during both the 1990s and 2000s it has averaged close to 1% per annum in New Zealand.  In contrast, the OECD average was about 2.2%.

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

We know that our economy has performed well in the recent past and that the total amount of goods and services produced has grown strongly.   Without new machinery or technology it follows that a huge increase in the number of hours worked was required.   This in turn has required employers to bring on vast extra numbers of employees.   And herein lies the crux — economic growth in New Zealand over the past fifteen years has been labour-rich.   Because employers have opted not to use more machinery or technology and to forego labour productivity growth we have enjoyed strong employment growth.

This labour-rich, low-productivity growth was necessary as New Zealand had a surplus of labour for most of the 1990s, largely the result of poorly skilled or inappropriately skilled people no longer being able to find jobs in previously protected industries such as car and television assembly.   Unemployment averaged almost 8% during that decade and it peaked at over 11% early in 1992. Due to labour rich growth the unemployment rate has been on a downward trend since 1992.   With unemployment currently at 3.6%, an historic low, the economy is regarded as being in full employment.   Most of the unemployed are between jobs — they may have left a job voluntarily and are taking their time to find something suitable.   This so-called 'frictional unemployment’ will always be with us and is not a source of concern at is largely based on choice.

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

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

Many of the most at-risk sectors of society have benefitted the most from strong employment growth.   The number of long-term unemployed has dropped from a peak of 91,000 in 1992 and an average of more than 50,000 during the 1990s to about 13,000 currently.   In the early nineties more than a quarter of Maori were unemployed.   Today the rate is down to a still-too-high-but-more-acceptable 7.6%.   The number of older workers (55 years and older) in employment has climbed from around 140,000 to almost 400,000 over the past fifteen years (though this was also encouraged by the change in the age of eligibility for New Zealand Superannuation).

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

New Zealand’s growth path contrasts starkly with that of the country currently hosting the Rugby World Cup.   France has enjoyed spectacular labour productivity growth since 1970, averaging 2.7% per annum.   This has occurred because businesses have responded to an overregulated labour market that impedes efficient hiring and firing, by investing in capital and technology rather than using labour and creating jobs.   As a consequence France has been burdened with persistently high unemployment.   And this has come with enormous social costs.   A key element behind the Paris riots of 2005 was high unemployment and social exclusion of its North African population.

New Zealand has now achieved full employment and provided opportunities for just about everybody who wants to work.   But in the future employers will not be able to rely on finding more employees if they wish to increase production as the supply of new labour is running out.   Over the next ten years the labour force will grow by less than 1% per annum and after 2020 it will cease to grow at all.   If we want to expand our economy in the future it will need to come from improved labour productivity rather than increased use of labour.

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