Wednesday, November 23, 2016

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. 




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