On the ongoing debate about New Zealand Labor Productivity

Everyone agrees that productivity is important for maximizing the welfare of the people of New Zealand. It directly affects wages and investments. In addition, everyone agrees that the way to evaluate New Zealand productivity is to compare it with other countries. However, what measure do we compare?

I plot New Zealand, Japan and the U.S. labor productivity per hour worked (Source: The most recent Conference Board data).

Visually, the plot suggests that the U.S. has been more productive than New Zealand and Japan; New Zealand was more productive than Japan up until the late 1980s; and then almost equally productive from the 1990s to 2016. Not many people would believe that New Zealand has been more productive than Japan.

These measures have trends. We cannot tell what the “average” productivity level is over the past 60 years and it might be pointless to forecast what it will be in the future because the “average” of productivity is a function of time trend, hence misleading.

One way to make the average meaningful is to remove trend from the data. Here too the matter is not straightforward because trend could be different types requiring different treatments, and it is not easy to tell the type of trend. Without going into the technical details, it is widely agreed that the growth rate of such data (i.e., the percentage change from one period to another) is a reasonably simple and a more informative measure than the level.

Table (1) reports the average of the level and the average of the growth rate of labor productivity per hour worked for the G7 countries, New Zealand and Australia over the period 1950-2016. Different conclusions could be drawn from the two statistics. Just like the graph, the average of the level suggests that New Zealand has been more productive than Japan, and Japan is the least productive in the group. The average growth rate, on the other hand, suggests that Japan has the highest productivity growth, New Zealand productivity is the same as Australia, the U.S., Canada and the U.K. but 2 percentage points lower than Japan, and 1 percentage point lower than the other non-English speaking European countries.

 A decade-average of labor productivity growth is in table (2). The high growth of the G7 has been highly influenced by the extraordinary growth of Japan from the 1950s to the end of the 1980s. Average growth of the G7 declined steadily. New Zealand and Australia also experienced high growth in the 1950s and the 1960s followed by a decline. Overall, it does not look very different from Australia and the G7 over the past 40 years. Also, both New Zealand and Australia have higher labor productivity growth than the G7 for the past 7 years.

Table (1)

Average Labor Productivity per Hour Worked (1950-2016)

Country	Level	Growth Rate (%)
Canada	35	2
Italy	35	3
Japan	23	4
France	38	3
Germany	37	3
U.K.	32	2
U.S.	43	2
Australia	34	2
New Zealand	28	2

The Conference Board measures the level of labor productivity per hour worked in 2015

US$ converted to 2015 price level with updated 2011 PPP.

Table (2)

Average Labor Productivity Growth (percent)

	G7	New Zealand	Australia
1950-1959	4	3	3
1960-1969	5	2	3
1970-1979	3	0	2
1980-1989	2	2	1
1990-1999	2	1	2
2000-2009	1	1	1
2010-2016	0	1	1

I conclude that, on average, labor productivity in New Zealand has been the same as in Australia, Canada, the U.S., and the U.K., and lower than France, Germany, Italy, and Japan. 

Housing Price in New Zealand

A long time ago when I was at the RBNZ, I showed that the typical positive correlation between money and prices over the business cycle (deviations of money and CPI from trend) has broken down in New Zealand. I am sure the same is true in other inflation-targeting countries.
http://www.rbnz.govt.nz/research-and-publications/discussion-papers/2001/dp2001-02-2

Successful inflation targeting rendered inflation stationary while money, which is not targeted by the CB, continued to fluctuate, hence no correlation. In economic theory, excess money growth fuels asset price inflation. People buy houses, stocks, etc. Housing is the dominant asset market in New Zealand. Here is a graph of the rate of growth of housing prices and the M2 growth lagged one year. Monthly data are from the RBNZ website (I calculated the quarterly data as monthly averages).

Visually, there is a theory-consistent positive correlation. There is a trend in both growth rates. It seems that this positive correlation between trending housing price inflation and lagged money growth may imply that money affects house price growth in addition to other micro and macro shocks (e.g., building restrictions, land shortages, zoning policies, population growth, etc.).

razzakw@gmail.com 

Why New Zealand’s wages are lower than Australia’s?

The Australians earn more than New Zealanders on average. For example, the Australian Bureau of Statistics reports the average weekly total earning in May 2016 to be 1160.90 Australian dollars while Statistics New Zealand figure for 2016 Q3 was 985.97 NZ dollars. Americans make more too. The microeconomic textbook explanation is straightforward. If (1) we supply more labour than Australians we will have relatively lower wages; (2) if our productivity is relatively lower; our wages would be relatively lower. Both (1) and (2) are evident in the data.

We supply relatively more labour (hours) than the Australians and the Americans. I measured the supply of labour as the average weekly hours worked when I was at the New Zealand Treasury in 2012. Hours depend on the consumption-income ratio, the marginal tax rate, the relative price of leisure, and the share of capital in production. Here is a graph for New Zealand, Australia, and the U.S.

Further, among other reasons for the increase in he supply of hours such as the increase in female labor supply, population of working age, immigration etc. the increase in labour supply (more hours worked) is also consistent with the decline in the reservation wage over time. The reservation wage has been declining relative to the real wage. The reservation wage is the wage equivalent of being unemployed. Most of the theoretical models of wage setting suggest that it depends on past real wages, labour productivity, and the unemployment rate. The reservation wage depends on the generosity of benefits, and other income supports the workers expect to have while they are unemployed. The benefits have been falling over time in New Zealand. The institutional dependence of unemployment benefits on past wage level, may suggest that the reservation wage also depends on past wages. The reservation wage depends also, on what the unemployed do with their time – the utility of leisure, which may include home production and income that, could be, earned in the informal sector. More on this is in Razzak (2015). Here is a plot of my estimate of New Zealand’s ratio of the average hourly reservation wage relative to the real average hourly wage.

And, we are less productive than the Aussies and the Americans. This has been shown in blogs (e.g., Michael Riddell’s blogs), the Conference Board data, and in many other papers to the extent there is a wide agreement.  

razzakw@gmail.com

References:

Razzak, W, (2003), Towards Building a New Consensus About New Zealand’s productivity. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=508262

Razzak, W., 2015, Wage, productivity, and unemployment: microeconomics theory and macroeconomics data, Applied Economics, Vol. 47, Issue 58, 6284-6300