The underperforming New Zealand economy

Today’s labour market data seem to point again to the underperformance of the New Zealand economy.  Oh, the headline rates of GDP growth haven’t looked too bad –  although they are quite modest in comparison with previous New Zealand growth cycles –  and employment growth has been strong.  But to what end?  Labour productivity looks still to be shockingly weak, yet another year ends with the unemployment rate well above Treasury estimates of NAIRU, and even as core inflation has picked up somewhat (yesterday’s post) wage inflation seems to be about as subdued as ever.  There seems to be something quite wrong with the economic strategy that presides over such outcomes –  and no sign from the major opposition parties that they have anything materially better or different to offer.

Hours worked, as captured in the HLFS, have increased strongly in the last five quarters, up by 6 per cent (adjusting for the break in the series, because of new methodology in the June quarter last year).  There have only been a couple of periods in the 30 year history of the series that have seen growth in hours worked that rapid.

We don’t have GDP data for the December quarter yet, and of course earlier quarters are always subject to revision.  But for the four quarters we do have, real GDP (averaging expenditure and production measures) rose by 4.0 per cent.   In other words, unless quarterly GDP growth for the December quarter is at least 1.9 per cent, we’ll again have had no productivity growth at all during that five quarters of rapid growth in hours worked.  Few commentators I’ve seen think GDP growth was anything like that strong  –  something a bit over 1 per cent seems closer to expectations.  If so, we’ll have had really rapid increases in hours worked and employment, but the economy will have got less productive at the same time.  (And recall that we’ve now had five years of no productivity growth).

In the past, periods when growth in hours worked have been very strong haven’t always seen rapid productivity growth.  There can be good reasons for that, if (on average) lower productivity workers are being reabsorbed into employment for example.  In the early-mid 1990s we had a couple of years of very rapid growth in hours worked, and over that period productivity growth, although positive, was pretty weak.     But over that couple of years the unemployment rate fell from around 10 per cent to around 6 per cent, and the employment rate also rose by around 4 percentage points.

Here is the unemployment rate (four quarter moving average to smooth through some of the quarterly noise, down and up)

u-rate-dec-16  The unemployment is still slowly trending downwards, but the pace is quite excruciatingly slow.  Over the five years in which there has been no productivity growth, the average unemployment rate has fallen from around 6 per cent to around 5 per cent, and over that period Treasury estimates that the natural rate of unemployment (determined by things like demographics, welfare provisions and labour market regulation) has been falling –  and is now around 4 per cent.

So we’ve had:

  • no productivity growth (perhaps even a contraction over the last year)
  • high and only slowly falling unemployment (and for those inclined to glibly respond that 5 per cent unemployment isn’t high, recall that that numbers mean that any one time one in 20 of those people available for wanting, wanting to work and making active efforts to find work can’t find a job).

And what of wage increases?  Unsurprisingly perhaps, there has been little sign of any recovery nominal wage inflation.    A standard response is that wages will inevitably lag improvements in the labour market, but….the unemployment rate has now been falling slowly for five years or so.

There is a variety of different wage inflation measures.   Here are two from the Labour Cost Index –  both the headline published series, which tries to adjust for productivity growth, and the Analytical Unadjusted index which is more like a raw measure of wage inflation.   In both cases, I’ve shown the data for the private sector.

lci

Of course, if one believes this data (in particular the red line) there must have been some continuing productivity growth in New Zealand, even if at a slower rate than previously.  Quite why SNZ finds (implied) productivity growth here, and not in national accounts (real GDP per hour worked) is a bit of a mystery.

The other measure of wage increases if from the QES. In this case, the annual rate of increase in private sector ordinary time hourly wages.

qes-wages

There is some volatility in this series, and I’m not sure I’d want to put much at all on the reported sharp fall-off in hourly wage inflation over the last year, but…….there is certainly no sign of an increase in wage inflation.

It is always easy to look around and find countries that have done worse than New Zealand –  several of the euro area countries spring readily to mind.    But our performance, and the gains for our people, are nothing much to celebrate.  And while, for example, there has been a global slowdown in productivity growth since the mid 2000s, New Zealand’s productivity levels are so far below those of the more strongly performing OECD countries, that there was no necessary reason why we needed to share in the slowdown.  It should, if anything, have been an opportunity for some convergence.  But there has been no sign at all of that.

I don’t find that particularly surprising –  an economic strategy that appears to involve attracting ever more people to one of the most isolated corners on earth, in an era in which connections, contacts, and proximity seem to matter more than ever, all while producing a very high real exchange rate (again resurgent in recent weeks/months), and the highest real interest rates in the advanced world, is simply a recipe for continued long-term underperformance.  One would like to think that the government –  and the Opposition which seems to support very similar policies –  has been surprised. They can’t, surely, have planned on such a bad performance.  But persistent bad outcomes, of the sort New Zealand continues to see, should be prompting some serious policy rethinks, not just more PR about how rapidly employment numbers are growing.

 

18 thoughts on “The underperforming New Zealand economy

  1. At the risk of sounding like a bit of a broken record is the issue the way productivity is measured? There seems to be a persistent productivity paradox in NZ where we can have strong growth in employment but weak productivity outcomes – as if each next person hired is marginally less productive than the previous hire…

    So you would hit diminishing returns quite quickly…

    Another way to look at this might be the ratio of fixed capital formation (excl residential housing) compared to the rate of employment growth – how much capital added for each additional job… does that tell us anything useful? if the ratio of capital per job isn low then one wouldn’t expect a lot of productivity uplift? But if private sector employers are rational then why would they create jobs for no benefit?

    Is there data on the breakdown between private sector and public sector employment growth? If the majority of the jobs are being created in the public sector one wouldn’t expect to see productivity growth emerging because its the public sector – no profit motive, so who cares….

    Might be on the wrong path here… but just trying to think around the issue…

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    • Actually you have it in on the nail. The very nature of hospitality is low productivity with diminishing returns. The $26 billion dollar tourist industry require foreign chefs, foreign waiters, foreign prostitues and don’t expect kiwis to aspire towards cleaners and baggage handlers. The more people and the more time spent with a customer equates to better service but at diminishing returns.

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    • A friend of mine came in from overseas to settle his 2 girls into the university in Auckland. It took 2.5 hours to clear customs. Obviously the National government is not spending enough on more customs officers. What a nightmare for an incoming traveler, stuck for 2.5 hours waiting in queue.

      Liked by 1 person

    • Of course, there is an important distinction between profitability and productivity. I’m certainly not suggesting that firms are doing anything irrational in thier hiring – seeking to profit maximise – but they are responding to the environment they find themselves in: high exchange rate and high (relative) real interest rates skew investment and activity towards the non-tradables (and labour-intensive) parts of the economy which historically have not been the basis for achieving fast productivity growth. As you suggest, business investment has been quite low (relative to population growth) in NZ for decades – not extraordinarily so right now, but in many respects just a continuation (perhaps accentuation) of the long-term trends.

      Most of the employment growth is private sector, altho of course rapid population growth does imply over time more public sector employment growth (teachers, nurses etc).

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      • You have to wonder how much productivity growth or gain there is in employing people to teach over-sea’s students. It seems many of the outfits go bust at the taxpayers expense.
        And again one has to wonder at all these child care centres (which the taxpayer provides most of the money for while the mothers go to the gym or sip latte’s or go around the boardwalks on their bikes.. Jee’s man Tauranga has more of these than kids I think.
        The question has to be “if there was no taxpayer subsidy would all the women put their kids in childcare?”
        Gotta work to pay the mortgage. No savings and high interest rates.
        and don’t even go the H&SW.
        I hear plenty of stories now about the cost of those policies. One small firm I know with about 4 employees has one person doing nothing else. They are gas mechanics at one small polytech. their t/o is amazing for something that barely existed 7 years ago.

        We could go on all day about these things but its sad that we waste so much energy on stuff that gets stuffed in a rubbish bin.

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  2. Andrew Little was channelling you though in his press conference when the election was announced. He said why are we having all this immigration if it wasn’t benefiting NZers generally.

    Or maybe you are just writing his speeches now?

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  3. Tourists spent an estimated $26 billion throughout the country in the year to December – up 8.3 per cent on the previous year.

    http://www.nzherald.co.nz/tourism-leisure-industries/news/article.cfm?c_id=95&objectid=11789455

    Unfortunately the type of industry focus which also happens to be our top industry with a record 3.5 million visitors will continue to drive poor productivity. The answers are very clear. Change the industry focus to high productive industries or face the inevitable consequence of low productivity growth. It is the nature of the hospitality business to have more people. It is.a service business. Service equates more people, more time spent caring and chatting with a customer. Less time and fewer people and rushed service equates to a poor service.

    Goldcoast provides mechanised theme parks that deliver multi billion dollar theme parks at much higher productivity than our fresh air and beautiful scenery approach. Frankly I have spent 2 weeks in the South Island holiday recently and within 3 days I was bored because beautiful snow capped mountains and beautiful lakes keep repeating throughout the journey. How many times a day do you actually want to see a beautiful postcard? But it is the stops along the way, it is the restaurants, the retail shops, the pleasant conversations with the shop attendants, the toilet facilities, the delicious food, the cleanliness of the environment, the drinking of that fresh clear sparkling water in that stream, oooops now contaminated by the 10 million milking cows and oops I am in the middle of nowhere and gotta take a leak so off to the nearest bush.

    The thing about tourists is eventually they seek their own flavours which means more foreign chefs, more foreign waiters, more foreign retail attendants, more foreign prostitues and don’t expect kiwis to aspire to be cleaners.

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    • A similar Goldcoast holiday for 2 weeks, i spent most days in the captured environment of theme parks with only captive access to high margin and cheap highly overpriced food for snacks, breakfast, lunch and dinner. In my South Island 2 weeks holiday, food was largely homecooked in the motel room kitchen purchased from the corner supermarkets, low priced, low margin with the occasional visit to a nice pricey restaurant with more waiters than patrons.

      Liked by 1 person

      • Can you imagine paying AUS$15 for a large cup of frozen shaved iced coca cola? Thats what you would have to pay for one of those giant cups in a Goldcoast themed park which you can buy for only $1 in MacDonalds with a meal. Sure you get to top up free for the rest of the day and you do get a souvenir themed cup but the excessive margin to keep a child happy?? Our free air and free beautiful scenery approach just does not cut it. The cleanup costs to maintain pristine cleanliness is not being fully costed but given as freebies by the NZ taxpayer.

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    • I agree with you about the tourism sector – low wage, low productivity… capital intensity is low in NZ compared to similar countries… see Michael’s comments above…

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      • Well that of course is because we allow low value tourists. If we stuck a 200 dollar charge at the gate to be spent on facilities such as loo’s that would solve two problems. Money for facilities and slowing down the el cheapo’s. Same we should tax the rental cars at a higher rate simply because they cause more policing and road issues.
        After all if we had on 3 million visitors instead of 3.5 of last years but they all paid more would we not be better off without the cheapies. Less pressure on housing as we talked about last night. The ones that buy a cheap car or van then drive around using the facilities for nothing or shitting in the bushes. Stopped at riverside car stop a couple of weeks back. Stunk of crap. cars and van without facilities should be banned and that included the wicked asn all until they have their own potties.(Not the first time we have encountered that.) Why should taxpayers fund their cheap holidays especially when they tend to go to free stuff rather than paid entertainment.

        We might even be able to afford more customs people although if we reduce the flow a bit that would increase the efficiency..

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    • Goldcoast provides mechanised theme parks that deliver multi billion dollar theme parks at much higher productivity than our fresh air and beautiful scenery approach.

      Reading the papers seems to show that’s not the case. One at least is almost in death throes.

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      • As Michael has explained earlier, there is a difference between productivity and profitability. A themed park generating $2 billion with 300 workers is far more productive, even if they can’t make a profit, than zero revenue from beautiful scenery that need 100 taxpayer funded cleaners

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  4. I don’t know if you listened to Gauti Eggertson’s interview on the Macro Musings podcast recently. He talked about the reasons the Fed didn’t do more during the Great Recession. It still amazes me how much central banking ineffectiveness seems to be driven by illogical inertia by old and conservative staff who are terrified of repeating the 1970s. As if that was the worst thing that could ever happen!

    PS George Borjas was on Econtalk this week, very interesting.

    Like

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