Wednesday, 30 April 2008

Productivity and wages in NZ and Australia

Back when Paul Krugman was still an economist he wrote
Economic history offers no example of a country that experienced long-term productivity growth without a roughly equal rise in real wages. In the 1950s, when European productivity was typically less than half of U.S. productivity, so were European wages; today average compensation measured in dollars is about the same. As Japan climbed the productivity ladder over the past 30 years, its wages also rose, from 10% to 110% of the U.S. level. South Korea's wages have also risen dramatically over time. ("Does Third World growth hurt First World Prosperity?" Harvard Business Review 72 n4, July-August 1994: 113-21.)
In other words productivity increases drive wage increases. Productivity is a measure of how efficiently inputs such as capital and labour are used within the economy to produce outputs of goods and services. The more output we get from a given amount of inputs the more productive we are. Labour productivity reflects improvements in how much output each worker can produce while multifactor productivity reflects increases in output due to improvements in knowledge, technology and innovation. So if New Zealand's government wants to close the gap between wages in New Zealand and wages in Australia, increases in productivity in New Zealand would have to be higher than those in Australia.

In a recent piece published in the Otago Daily Times and, in a slightly different form, in the New Zealand Herald, Roger Kerr notes that
In Australia wages are already some 30 percent higher than in New Zealand, and a comparison of productivity growth trends in the two countries suggests that the gap between the two will widen even further under present policies.
Consider the two graphs, from Kerr's article, below

The publication by Statistics New Zealand of productivity data for the ‘former measured sector’ (which covers most of the business sector and around 63 percent of the economy) allows comparisons with Australia to be made on a like-for-like basis. As the charts above show, for the period 1992-2000 the average annual rates of growth of both labour productivity and multifactor productivity in New Zealand on a point-to-point basis outstripped the comparable growth rates in Australia. This performance by New Zealand was based on the reforms of the post-84 period. But also consider the data for the 2000-7 period. Here the situation is reversed. As Kerr points out, we see
... Australia doing better than New Zealand, even though Australia’s average productivity growth rates have also declined relative to the 1990s. New Zealand’s average labour productivity growth rate has fallen to 1.2%, well below the 3% rate achieved in the earlier period.
Another factor affecting wages is hours worked. Here Kerr notes that
... recent data indicate that full-time employees in Australia work slightly longer average weekly hours than full-time employees in New Zealand.
Thus to catch up with Australia we must work harder and smarter. Kerr closes his article by explaining that
Recent IMF research has concluded that Australia’s superior productivity performance is largely explained by its economic reforms, particularly in the labour and product market areas.
And goes on to say that it is therefore
... mystifying that recent productivity research by the New Zealand Treasury does not focus on the impact of New Zealand’s economic reforms on the productivity improvements of the 1990s, and the impact of policy reversals and increased government spending, taxation and regulation on the much lower productivity growth rates in the current decade.
The issues Kerr raises here are those which the New Zealand government must address if it truly wishes to close the gap between us and Australia.

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