Tertiary education, skills and productivity

New Zealand’s labour productivity

What is productivity?

Productivity is a measure of how efficiently a firm, or an economy, uses inputs, such as labour and capital, to produce goods and services. Changes in productivity are not the same as changes in levels of production. An increase in productivity can mean that more goods and services have been produced with the same amount of capital and labour, or that the same amount of goods and services has been produced with less capital and labour. Furthermore, the usual measure of productivity is the growth in productivity, that is, the extent to which efficiency is increasing.

There are three standard measures of productivity: labour productivity measures the output achieved per worker or per hour worked; capital productivity measures the output achieved per unit of capital input; and multifactor productivity takes account of both labour and capital inputs and represents the portion of output growth that cannot be attributed directly to growth in labour or capital inputs. As such, it can be taken to represent improvements due to other sources, such as technology change, new knowledge and skills, and improved methods and processes (The Treasury, 2008a and Statistics New Zealand, 2009a).

Low growth in productivity

In the period from 1991 to 2002, economic growth averaged 3.5 percent per annum. Over the same period, labour productivity growth was between 2 and 3 percent and multifactor productivity growth around 2 percent.  In the period from 2002 to 2006, economic growth increased to an average of over 4 percent per annum. However, labour productivity growth decreased to 1.5 percent and multifactor productivity growth to less than one percent. As economic growth slowed from 2006 to 2008, productivity growth also continued to decline.

Source: Statistics New Zealand, Productivity Statistics.

Figure 4 shows that New Zealand’s labour productivity levels have been low in comparison with our main trading partners – including the United Kingdom, United States, Australia and Japan. Growth has also slowed relative to other countries since 2002, such as Ireland, Poland, Greece and Turkey, who are at the periphery of the European Union.

Figure 4: Long-term labour productivity levels

Source: The Conference Board and Groningen Growth and Development Centre (2009).