Treasury: No quick fix to NZ and global productivity problem
New Zealand is not alone in experiencing a drop in productivity and there may not be a fix on the horizon, the Treasury is warning.
Productivity growth in the economy averaged 1.4% annually between 1993 and 2013 but averaged only 0.2% over the last 10 years, it reported.
Stats NZ estimated in April that labour productivity went into reverse and fell 0.9% in the year to March last year.
Research published yesterday by the Treasury concluded a range of factors was likely to blame, including a slump in innovation — essentially fewer and the slower take-up of inventions — weak investment and a slowdown in international trade and connections.
Overall across the 38 developed countries that are members of the OECD, annual productivity growth was close to 2% in the 1990s before falling sharply to about 0.8%, it noted.
Declining productivity hits economic growth, people’s standard of living and — because it curtails tax revenue — greater difficulties for governments in balancing their budgets.
However, the Treasury also noted one irony with common measures of labour productivity, which is that they tend to increase when unemployment is rising and fall when economies are close to full employment.
The usual explanation is that economic booms draw less experienced and skilled people into the workforce, lowering the average individual contribution of workers.
Treasury’s view was that productivity growth was most likely to remain slow over the coming years.
Educational achievement had plateaued across a number of OECD countries, which could be a culprit, it said.
It was also possible there was “a growing mismatch” between the supply and demand of specific skills due to rapid technological change.
But innovation was “perhaps the most fundamental determinant of productivity”, it said.
“Techno-pessimists argue that big gains from general purpose innovations have run their course.”
One researcher argued the technologies of the past 150 years had had “such a profound impact” that it would not be surprising if current technologies were not able to produce the same impressive effects, it said.
But techno-optimists argued that the IT and artificial intelligence “revolutions” were still in their infancy and it would take time for their full potential to unfold, it also said.
While New Zealand’s track record had been relatively poor, it was likely that common factors were playing out across different countries, the Treasury concluded.
Chief economic adviser Dominick Stephens said the productivity slowdown was a key factor behind the worsening economic forecasts the Treasury released in March.
At the moment, it is still assuming a 1% average annual improvement in productivity in future years. But it plans to reconsider its assumptions about the long-term track in a report it will issue next year.
“Following a review in 2019, the Treasury uses a rolling 30-year average of productivity growth as its long-term labour productivity assumption.
“However, the declining trend in labour productivity may mean that the 30-year average is no longer a reliable predictor of future trends,” it warned.