2. Immediate Drivers of Income Growth
Key Points
- Improvements in material living standards (GDP per capita) can be attributed to increases in either labour utilisation or labour productivity (total income generated per hour worked). New Zealand has a relatively high labour utilisation rate compared with its OECD counterparts, but a relatively low labour productivity.
- Given the limits to improving labour utilisation further, future improvements in material standards must come primarily from labour productivity growth.
- The measured growth rate in labour productivity for the whole economy has been at or below the level in benchmark countries since 1980.
- This measure includes sectors where it is difficult to measure productivity, so the rate might be misleading. In the measured sector, where more accurate measures are available, the average growth rate of labour productivity has exceeded that of Australia since 1988.
- The amount of capital available per hour worked has increased in recent years.
- The whole economy measure of multi-factor productivity (MFP) growth remains low by OECD standards, but measured sector MFP growth is similar to Australia's.
Introduction
Improvements in material living standards can be attributed to increases in either labour utilisation (the number of paid hours worked per head of population, per year)16 or labour productivity (the amount of output produced for each unit of paid work). Each of these can be further broken down: labour productivity into changes in the capital-labour ratio and MFP; labour utilisation into changes in the proportion of the total population of working age, the participation rate (the proportion of the working-age population in the labour market), the unemployment rate, and hours worked per person employed. This chapter assesses these immediate contributors to income growth for New Zealand, comparing them with past performance and with other benchmark economies.
2.1 Labour Utilisation
Much of New Zealand's recent good economic growth reflects the rise in the labour utilisation rate, which is now one of the highest in the OECD (7th place using 2005 figures). Improvements in labour utilisation (i.e., the total number of paid hours worked per head) contribute directly to material living standards and can also have non-financial benefits such as better social inclusion.
Our high rate of labour utilisation results from a combination of a large share of the total population being of working age, high participation rates, low unemployment and a high average number of hours worked per person relative to other OECD countries.
New Zealand has a low proportion of its population aged 65 and over relative to the OECD average, and a larger proportion of people of working age. A high share of the population of working age means that more workers will be available for employment, and therefore - other things being equal - aggregate labour utilisation will be higher.17
Furthermore, the total labour force participation rate has increased over the past 15 years, largely due to the increase in the participation rate for females and for older age groups (i.e., 55 years upwards). The labour force participation rate measures the proportion of the population of working age that is actively "in the labour market" - that is, either working (employed) or without paid work and actively seeking work (unemployed). All other things being equal, the higher New Zealand's participation rate, the higher its aggregate labour utilisation.
In addition, the unemployment rate for New Zealand has been falling since the late 1990s. The unemployment rate is the proportion of labour market participants not currently employed. This is now at its lowest level since the 1980s (3.6 per cent in the June 2007 quarter) and is also one of the lowest in the OECD.
While labour utilisation has a direct influence on economic growth in New Zealand, economic growth can itself affect labour utilisation rates. In prosperous times, people are likely to find it easier to get jobs, and wages also tend to rise, attracting more people into the workforce. Given the limits to further improving labour utilisation, future improvements in material standards must come primarily from labour productivity growth.
2.2 Labour Productivity
Whole Economy
Labour productivity is a measure of how effectively labour is being used as a production input in the economy, or how much real output (goods and services) is produced per hour worked.
New Zealand's level of aggregate labour productivity is at the lower end of the OECD range (22nd place using 2005 figures). Likewise, New Zealand's five-year average annual growth rate of gross domestic product (GDP) per hour worked has been moderate relative to other OECD countries.
MFP measures the amount of output produced in relation to inputs of both capital and labour. A change in MFP therefore reflects the change in output that cannot be accounted for by increases in inputs of labour and capital.18 It captures a range of other factors that may cause output to increase, such as skills (including management capability), technology, workplace organisation and culture, and economies of scale. New Zealand's average annual MFP growth has remained low but stable relative to OECD comparator countries. Consequently, issues around innovation, technology and skills are the focus of a range of government policies.
Measured Sector
The figures discussed above take into account labour productivity across the entire economy. However, it is very difficult to measure productivity in some sectors. For instance, there are no precise output measures in government non-market industries, where services such as defence, health and education are provided free or at nominal charges. For this reason, New Zealand and Australian statistical agencies report labour productivity in the "measured sector"19 of the economy, which can provide a more accurate comparative picture of the two economies' productivity growth rates.
On average in the measured sector, labour productivity has grown slightly faster in New Zealand than in Australia since 1989 (although growth has slowed somewhat since 2001). This is different from the picture across the whole economy (Figure 2.5). Specifically, since on the whole economy measure, Australia has performed as well as the OECD, it raises questions about whether New Zealand's whole-of-economy performance has matched the OECD also.
Likewise, measured sector MFP has grown faster than Australia's since 1988.
Labour productivity growth in New Zealand has not been the same across all parts of the measured sector. Significant improvements have come from: electricity, gas and water supply; finance and insurance; transport and storage; and communication services. However, inconsistencies prevent the inclusion of other important sectors, such as agriculture, in this data.
The amount of physical capital in an economy is an important influence on economic growth. Increasing the amount of capital directly influences labour productivity by increasing the quality and quantity of machinery, equipment and infrastructure available to each worker. New Zealand's capital- labour ratio is low by OECD standards20 and New Zealand workers do not appear to have had as much physical capital to work with as workers in Australia. However, New Zealand's capital-labour ratio has been trending up since the late 1980s, with the rate of growth increasing since 2003. This indicates an increase in the use of capital in production processes and the chance to reap economic growth benefits in future.
Figure 2.1 Labour productivity and participation, 2005
Source OECD Country Profile 2007; OECD Productivity Database
→ Full size version of Figure 2.1 [124 kB JPG]
Labour Utilisation. New Zealand has achieved its current level of GDP per capita by having a high labour participation rate relative to other countries in the OECD, which offsets a relatively low level of labour productivity.
Figure 2.2 Ratio of the population aged 65 and over to the total population (cross-country, with projections)
Source OECD Factbook 2007
→ Full size version of Figure 2.2 [136 kB JPG]
New Zealand has a relatively small proportion of its total population aged 65 and over by OECD standards, but this is projected to increase both absolutely and relative to the OECD.
Figure 2.3 Workforce participation rate by age group and gender for selected years
Source Statistics New Zealand
→ Full size version of Figure 2.3 [139 kB JPG]
The total labour force participation rate has increased over the past 17 years, largely due to increases in the participation rate for females and for older age groups.
Figure 2.4 Standardised unemployment rate (cross-country)
Source OECD Factbook 2007
→ Full size version of Figure 2.4 [145 kB JPG]
The unemployment rate for New Zealand (3.6 per cent in the June 2007 quarter) is at its lowest level in 20 years, and is one of the lowest in the OECD.
Figure 2.5 Growth in labour productivity (cross-country)
Source OECD Productivity Database September 2006
→ Full size version of Figure 2.5 [173 kB JPG]
2.2 Labour Productivity. New Zealand's growth in GDP per hour worked has been within the cluster of benchmark economies from the late 1970s onwards. However, New Zealand's current growth rate lies below its OECD counterparts.
Figure 2.6 Average annual growth rate of multi-factor productivity (cross-country)
Source OECD Productivity Database 2006
→ Full size version of Figure 2.6 [109 kB JPG]
New Zealand's average annual MFP growth has remained low relative to OECD comparator countries.
Figure 2.7 Annual growth rate in labour productivity, measured sectors
Source Statistics New Zealand; Australian Bureau of Statistics
→ Full size version of Figure 2.7 [119 kB JPG]
The annual growth rate in labour productivity in the measured sector fluctuated dramatically during the 1990s. It has been relatively stable since 2001, but hit its lowest growth rate in almost a decade in 2005–2006.
Figure 2.8 Labour productivity index, measured sectors (1988 = 1000)
Source Statistics New Zealand; Australian Bureau of Statistics
→ Full size version of Figure 2.8 [90 kB JPG]
Over the past 20 years, New Zealand achieved a higher average labour productivity growth rate in the measured sector than Australia did.
Figure 2.9 Average annual labour productivity by sector, measured sectors
Source Statistics New Zealand
→ Full size version of Figure 2.9 [87 kB JPG]
Labour productivity levels differ substantially across New Zealand's measured sectors. The biggest improvements have come from electricity, gas and water supply; finance and insurance; and transport and communication services.21
Figure 2.10 Index of capital-labour ratio, measured sectors (1988 = 1000)
Source Statistics New Zealand; Australian Bureau of Statistics
→ Full size version of Figure 2.10 [94 kB JPG]
The capital-labour ratio index has trended upwards since the 1990s, and from 1988 until 2003, average growth was ahead of Australia's.
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