Productivity growth in perspective

Someone sent me a copy of a press release put out today by the Minister of Finance, Steven Joyce, is his capacity as the chair of National’s campaign.    In it he claims that productivity growth over National’s term of government has exceeded that when Labour was last in office, and has exceeded that of many other OECD countries.

On the latter claim, over the whole of government’s term in office, my view is that it is a broadly fair description.  I’ve put out posts noting that we’ve been no better than middling over the whole period since just prior to the recession and financial crisis.  That didn’t seem to me to be a particularly good performance, in view of the fact that (a) we had a big lift in the terms of trade, (b) we didn’t have a domestic financial crisis, (c) weren’t in the euro and (d) we didn’t run out of room to use conventional monetary policy.  Oh, and we had a big levels gap –  we were a lot poorer –  and were supposed to be about catching up.

But my comments, and those of J B Were economist Bernard Doyle, have focused on the last five years or so.   Since then, on New Zealand official numbers, our productivity has gone slightly backwards –  ie the level now is slightly less than it was five years ago.    That is sufficiently stark, and has now gone on for long enough, that it seems worth singling out.   What, one might wonder, would be likely to turn that around?  (Frankly, I’ve seen nothing from either main party  –  or, for the avoidance of doubt, minor parties – that seems very promising.)   It is difficult to get very up-to-date useful data for many other countries, but over that five years we have certainly done less well than the US and Australia.

What about comparisons across terms of government?  We can only calculate the GDP per hours work series back to 1987, so I’ve shown  productivity growth in the term of the 1990s National government (1990q4 to 1999q4), the Labour government of the 2000s (1999q4 to 2008q4), and the current government (from 2008q4 with GDP data only available to 2017q1). I’ve also shown the last five years.

For each of those periods I’ve also shown the exactly comparable data for Australia.   Australia is one of the few countries for which exactly comparable (real, quarterly, national currency) data are available.  They are shown on the ABS website.  Australia is also a relevant comparator because (a) it didn’t have a domestic financial crisis, or (b) run out of monetary policy room, and (c) because it is the easiest alternative option for New Zealanders (migrating) and a standard historical comparator.  The aspiration of catching Australia was one the current government articulated when it came into office.

As a reminder, for New Zealand I have:

  • averaged the two real GDP series (expenditure and production).  Using one or the other alone will produce slightly different numbers, but there is no obvious reason to prefer one over the other, and
  • divided the resulting series by the HLFS hours worked series, and
  • corrected for a series break in the HLFS hours worked series in June 2016, when the survey question was changed.  Not correcting for that would lower productivity growth estimates over the last few years by a further 2 per cent.

And this is the resulting table [UPDATE: with some very minor corrections]

Cumulative growth in real GDP per hour worked (per cent)
NZ Australia
National (90q4 to 99q4) 8.5 20.7
Labour (99q4 to 08 q4) 12.1 12.4
National (08q4 to 17q4) 6.7 13.7
Last five years (to 17q1) -0.2 7.5

As it happens, in not a single one of these particular periods did productivity growth in New Zealand exceed that in Australia  (although there will be shorter periods where we did).

There are other measures of course, but real GDP per hour worked is a pretty standard basis for comparison.  And to make such comparisons of growth rates sensibly (as distinct from levels comparisons) one shouldn’t use PPP-converted data but rather real national currency data as I have done here.

As a caveat, governments can’t take all the credit or all the blame for productivity trends in their time in office.  International trends matter, and even policies work with a lag.  Recessions affect comparisons – and I don’t suppose anyone is going to suggest the 2008/09 recession was either New Zealand party’s fault.      Partly for that reason I’ve suggested focusing on the distinctive, and disconcerting, New Zealand productivity performance over the last five years.  The relevant growth number is zero (or marginally worse).

What’s happening to immigration data?

Back in May when Statistics New Zealand released the first results of their new 12/16 method of calculating net migration, based not on surveyed intentions, but on what travellers subsequently actually did, I was free with my praise.    The new data would provide a very useful, if lagged by at least 16 months, additional insight on what migrants were doing.  In particular, it offered richer insights on the activities of New Zealand citizens (we have administrative data on visa approvals etc for non-New Zealanders, but of course New Zealanders don’t need approval from our government to come and go).

But it seems that I should have been more suspicious.  This morning SNZ released the second wave of the data, bringing the data forward to March 2016 (for which they needed to be able to look at subsequent movements up to the end of July 2017).    That’s good, and the data are even available in a more user-friendly format than when they put the first release out.

But then there was this in the SNZ release

“With the pending removal of departure cards, developing the ‘12/16-month rule’ is a part of our work towards ensuring we can measure migration without depending on traveller cards,” population statistics senior manager Peter Dolan said.

“In the near future, the outcomes-based ‘12/16-month rule’ is expected to become a key component in how we determine the number of migrants in New Zealand.”

This is just astonishing.  Or perhaps not, but appalling anyway.  For a long time there has been a push  –  presumably from airlines and perhaps bureaucrats –  to get rid of arrival and departure cards.  I was involved from the Reserve Bank side in pushing back against an earlier initiative to dump them more years ago than I can now remember.     We pointed out the value of timely high frequency data on movements of people across the border ((tourists and migrants) for those doing macroeconomic policy and associated forecasting and analysis.    Bear in mind that New Zealand not only has some of the largest migration flows (in, out, and net) of any advanced economy, we also have among the most variable migration flows.  And cyclical fluctuations matter a lot when your job is cyclical stabilisation (ie monetary policy) –  let alone making sense of short-term developments in the housing market.   So you’d think it might be a high priority to have and keep high quality high frequency data.

And, as it is, we have some of the very best migration data in the world.   Being an island country, we have secure borders.  Being a remote set of islands, almost everyone arrives by air, at a handful of secure locations.  So it is easy to collect accurate data, and a pretty rich set of data, and to get it out pretty quickly  for forecasters, analysts, and even politicians to use.

I’ve explained here previously why the resulting PLT data has its limitations.   It isn’t a good basis to use to look at immigration policy itself.  Approvals data from MBIE is better for those purposes –  and would be better still if they made the information available in an accessible format on a more timely basis.     And the PLT data are based on self-reported intentions, and intentions aren’t always what people end up doing.  Some people think they are leaving permanently, and are back six months later, and vice versa..   But intentions data isn’t nothing either  (just as business surveys capture intentions/expectations and things don’t always turn out as they expect).    The patterns –  and especially the cyclical patterns, the turning points –  in the PLT data tend to match those in the (lagged) 12/16 data quite closely.

There are quite enough gaps (and long lags) in New Zealand economic data as it is –  monthly CPIs, monthly manufacturing data, quarterly income measure of GDP just for starters –  that I’m just stagggered that key economic agencies are apparently willing to let SNZ/Customs go ahead and consider dropping departure (and arrival?) cards.  Where are Treasury and the Reserve Bank on this?

How, specifically, does it matter?   Without departure or arrival cards we would, of course, still have immigration approvals data for most non-citizens (other than Australians).  In principle, they could be published weekly or monthly with just a day or two’s lag, and be available in quite accessible formats.  Since approvals lead actual arrivals, there is certainly useful information in those approvals numbers (it is just that they aren’t made easily available now).

We could presumably also have data on the total number of people crossing the border (gross and net) from passport scanning.   I’m not aware that those numbers are published at present, but they could be.  And presumably they could be broken down by nationality (or at least by the passport the person happened to be travelling on).    That would be useful –  relative to having no arrivals or departures data –  but not very.   If you look at total net arrivals or departures (or net) data it is enormously volatile, and thrown around things like Lions tours –  in other words, holidaymaker and other short-term visitor numbers swamp movements of migrants.   Using that data alone, we’d have no ability to pick turning points for some considerable time after the turn had already happened.

The gaps would be particularly serious for the movement of New Zealanders, and more than half the variability in the 12/16 measure of net migration has arisen from fluctuations in the movements of New Zealanders.  We would have no secure way of knowing if someone leaving was planning to be off for a week’s holiday, or intending to stay away for ever.  The 12/16 method would eventually tell us what they did –  but there is a lag of almost 18 months on the availability of that information.    And even if the new plan involves keeping arrival cards and only getting rid of departure cards, most of the variability in New Zealanders’ migration movements is in the numbers leaving, not the numbers arriving.

Less importantly, without the departure cards we would seem likely to lose the ability to analyse migration (including reflows outwards by migrants who become NZ citizens) by the birthplace of the migrant.

Perhaps someone has done a robust cost-benefit analysis on getting rid of departure (and arrival?) cards.  If so, I would be keen to see it, and particularly keen to see how the relevant officials have factored in the loss of some of world’s best migration data to macroeconomic monitoring and forecasting, in a country with some of the most volatile immigration flows in the advanced world (and not a great track record of getting monetary policy, or housing markets, right as it is).  And even if one sets aside the macroeconomic analysts interests, it is not as if net migration numbers are one of those issues of no political salience at all.  Put an 18 month lag on decent data, and you risk not silencing debate – which some might wish for – but allowing all sorts of misconceptions and concerns to flourish, which no one will be in a position to allay.  It would, frankly, seem crazy.    Immigration has a economic and political salience here which it might not have in a country with land borders and small permanent inflows/outflows.

In the report they released this morning, SNZ recognise that 17 month lags aren’t exactly ideal.   They say they have plans to try to come up with something better, but frankly they don’t seem that confident.

The analysis in this report shows the outcomes-based measure is better suited to estimating migration levels when accuracy is the primary concern. However, a 17-month wait for migration measures is not always appropriate. Stats NZ is prioritising work to address this.

Improving the timeliness of outcomes-based migration measures

The 12/16-month methodology of the outcomes-based migration measure will always carry a minimum associated lag of 17 months.

For this reason, Stats NZ is investigating methods and data sources for a more-accurate estimate of migration than the current PLT measure, but one that is also suitably timely.

These estimates will be generated through a probabilistic predictive model of traveller type (ie short-term traveller, or long-term migrant), based on available characteristics of travellers. Such a model will provide a provisional estimate of migration, which we can then revise (if required) as sufficient time passes for us to apply the outcomes-based measure. The migration statistics series will be extended to include both provisional and final estimates of migrant arrivals and departures.

What we are trying to model

A modelling approach needs to extract the small number of migrant movements from the very large number of overall border movements. For example in the year ending June 2017 there were:

  • 131,400 migrant arrivals, of 6.53 million arrivals (2.0 percent of all arrivals)
  • 59,100 migrant departures, of 6.46 million departures (0.9 percent of all departures).

This shows the imbalance of the traveller type present in the border movements. This highlights the considerable challenges that exist in achieving the required level of precision when estimating migration through a modelling approach.

In a country where migration flows matter, and fluctuate, as much as they do here, you might hope that they could show that they have techniques that would actually work before talk of eliminating departure cards got going.

Anyway, what do the latest wave of data actually show?    In these charts, I’m showing the 12/16 method and the PLT estimates for the various citizenship classes.

New Zealanders

nz citizens

The patterns are very similar (although the cumulative net outflow has been about 10 per cent smaller than the PLT numbers had suggested).  But, to reinforce the point above, the PLT data are an excellent indicator of cyclical fluctations in NZ citizen movements.  That is greatly jeopardised if departure cards are lost.

And here are non-citizen net migrant numbers.

non NZ citizens

There are, at times, big differences in the two series, but –  and this matters for macroeconomists –  the turning points are very much the same.  There is information in the PLT numbers relevant to, for example, the number of non-citizens likely to need a roof over their heads, and thus to housing market pressures.

The other thing I would note about this chart (and it is a point I’ve made previously) is that the net inflow of non-New Zealanders in the latest year for which we have this data (year to March 2016) is still less than the peak inflow in 2002.  And New Zealand’s population today is about 20 per cent larger than it was then.  In per capita terms, there are no record inflows (large certainly, but not record).

And here are the total net flows on the two measures


They don’t match up perfectly –  one wouldn’t expect them to, and there is information even in the differences (eg what led people to change their plans) –  but no analyst would happily give up a series that provided a 17 month lead this (relatively) good on the 12/16 series.    (And, as above, in per capita terms the peak inflows look as though they will struggle to reach 2002 peaks-  albeit those peaks were shorter-lived).

And finally, here is just the 12/16 data.  Behold what SNZ would like you to consider as the official series.

12-16 method

It is good to have this data.  But, even together with the administrative approvals data, it can’t replace the PLT data.  If that goes –  if departure cards are dropped –  we risk a new, big, hole, in the New Zealand stock of statistics.



Productivity, wages, and other debate thoughts

Like many, I watched the major party leaders’ debate last night.   It was civil and courteous, playing the issues rather than the person.  So far, so good.  But sadly neither leader seemed to offer anything very substantial on fixing our pressing economic challenges, or even show any real sign of understanding the issues.     At a time when the unemployment is still well above what it was a decade ago, when the underutilisation rate for women is still almost 15 per cent…..


…when there has been no productivity growth for five years, and when the export share of GDP has been shrinking, the Leader of the Opposition seemed content to concede that the economy was in good shape.  “Relentlessly positive”  I suppose.

Not that the Prime Minister was having a bar of any concerns about productivity.   As Newsroom put it

English dismissed outright a report from sharebroker J B Were which concluded the country had a productivity recession. They were wrong. “They are way over-stating the case. Productivity in New Zealand has been growing pretty well….

Well, you can read the J B Were piece for yourself.  I did when it came out, and did again this morning.   It made many of the points I’ve been making here for some time.    There isn’t anything in the economic side of the report I’d materially disagree with.  The data –  as officially reported by Statistics New Zealand –  speak for themselves on the productivity underperformance, particularly over the last five years.

I’ve run this chart numerous times before.

real GDP phw july 17 Not only have we had no labour productivity growth for five years, but our near-neighbour Australia –  which the government was once willing to talk about catching up to – has gone on generating continuing labour productivity gains.    Yes, there has been a productivity growth slowdown in much of the advanced world, dating back to around 2005.    But our additional and more recent slowdown –  well, dead stop really – looks like something different, and probably directly attributable to New Zealand specific factors.   Things New Zealand governments have responsibility for responding to.

I’ve also shown this chart before –  labour productivity for the better-measured parts of the economy, with SNZ’s attempt to adjust for changing labour quality. It is annual data, and only available with a bit of lag.

market sector LP

Again, no labour productivity growth at all in the last few years.

And what about multi-factor productivity growth?  It doesn’t get as much attention, partly because the data are only annual, and the construction of these estimates involves quite a few assumptions.   Nonetheless, here is the SNZ estimate for the (better) measured bulk of the economy.

mfp to 2016

The series is cyclical –  if machines are idle in a recesson estimated MFP falls and then recovers as utilisation picks up –  but looking through the recession, the estimated index level of MFP is the same now as it was 10 years previously.  No growth.

But somehow the Prime Minister thinks “productivity in New Zealand has been growing pretty well”.    One for the Tui billboards I’d have thought.

And all that is without even getting into the lamentable failure of governments led by both main parties to do anything about reversing the precipitous decline in levels of productivity in New Zealand relative to those in other advanced economies.    Lifts in the terms of trade –  experienced under both this government and its predecessor –  are of course welcome, but they can’t be a credible medium-term substitute for productivity growth.

From the other side, the Leader of the Opposition’s suggestion that data on real wage growth didn’t matter, and what really mattered was how people felt, seemed almost equally risible.  In terms of attracting votes, perhaps she is right.   But when the Prime Minister pointed out that real wages have been rising, he was of course correct.  I’m not sure why people put so much weight on the QES measure of hourly wage inflation.  It has well-known problems (for these purposes) and is hugely volatile.   Here is a chart showing wage inflation for the private sector according to (a) the QES, and (b) the Labour Cost Index, analytical unadjusted series.

wages debate  No economic analyst thinks wage inflation is anything like as volatile as the blue line –  in fact, wage stickiness, and persistence in wage-setting patterns is one of the features of modern market economies.

And here is the chart I ran last week, comparing real private sector wage inflation (the orange line above, adjusted for the sectoral core measure of CPI inflation) with productivity growth.

Real wage inflation now is lower than it was in the pre-2008 boom years, but it is running well ahead of productivity growth (however one lags or transforms it).    From here, lifting productivity growth is the only way real wage inflation is going to increase, and such increases in economywide productivity really should be recognised for what they are –  a well overdue imperative.

Sadly, the Prime Minister seems to want to bluff his way through, simply pretending there isn’t an issue, with no real answers as to how to  (for example) lift the outward-orientation (exports and imports) of the New Zealand economy, and refusing to face the fact that productivity growth has vanished since the latest new large net migration inflow began in 2013.  It won’t be the only reason why productivity growth has been vanished, but it is unlikely that there is no connection at all (and certainly the much-vaunted official and political claims that high non-citizen immigration flows are helping lift productivity look emptier than ever).

And the Opposition leader is no better.    When Ardern was asked last night who was going to build the houses if immigration was cut back, my 14 year old son turned to me and asked “why doesn’t she just say that if there are fewer migrants fewer houses would need to be built”.   Sadly, I could only point out that Labour’s approach to immigration actually isn’t materially different to the National Party’s.  The net inflow might be a lower in the first year, but in the essentials they are two sides of the same coin.  Here is what I wrote when Labour released their policy in June.

Overall, some interesting steps, some of which are genuinely in the right direction.  But, like the government, Labour is still in the thrall of the “big New Zealand” mentality, and its immigration policy –  like the government’s – remain this generation’s version of Think Big.  And it is just as damaging.    The policy doesn’t face up to the symptoms of our longer-term economic underperformance –  the feeble productivity growth, the persistently high real interest and exchange rates, the failure to see market-led exports growing as a share of GDP, and the constraints of extreme distance.  None of those suggest it makes any sense to keep running one here of the large non-citizen immigration programmes anywhere in the world, pulling in lots of new people year after year, even as decade after decade we drift slowly further behind other advanced countries, and se the opportunities for our own very able people deteriorate.

And what is Labour’s solution to the economic challenges?   There is lots of talk about more skills training, even though the OECD surveys suggest that our people are already among the most skilled in any OECD country.       Beyond that, Jacinda Ardern was invoking the OECD –  “they’ve told us what we need to do” to lift productivity and economic performance.

Well, this table is from the latest OECD Economic Survey of New Zealand, released a few months ago.  On the left hand side are the “main findings” and on the right the “key recommendations”

OECD recs

I don’t wildly disagree with most of those recommendations –  sceptical as I am of R&D subsidies.     But (a) with the exception of R&D subsidies, does this look at all like Labour Party economic policy  (has there been talk of the tax working group possibly proposing lower capital taxes?), and (b) more importantly, does anyone really think that these items, even taken together, are remotely enough to materially reverse the decades long decline in our relative productivity performance, that the OECD themselves highlighted?

Sadly, there was all too much of “let’s pretend” to the debate, and nothing to suggest that either side is really serious about engaging with, and delivering solutions to, the decades of underperformance, presenting now in five years of no productivity growth at all, and an economy increasingly skewed inwards rather than outwards.