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.






23 thoughts on “Productivity, wages, and other debate thoughts

  1. Reblogged this on The Inquiring Mind and commented:
    A well thought commentary on last night’s Leaders Debate on TVNZ.
    For Adam the final paragraph summed up the entire reality:-

    Sadly, there was all too much of “let’s pretend” to the debate, and nothing to suggest that either side is really willing to suggest it is 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.


  2. I hope you did point out that International students who contribute $4billion to the economy and foreign workers for the Christchurch and Kaikoura rebuild actually forms most of the migrant increases or did you conveniently forget to let your son know?


  3. They aren’t “most” of the increase, but they are actualy where the two parties’ policies do diverge. As I’ve said repeatedly, I’m all in favour of unsubsidised export industries, although in this particular case (a) they aren’t ‘unsubsidised’ (the “subsidy” is the right to work, and access to pathways to residence) and (b) they accentuate housing/land problems in much the same way as any new person needing a roof over their head.

    As you also know, I focus my own proposals for change on the the 45000 per annum residence approvals programme, where Labour and National are at one.


    • “International students in Australia on a valid student visa can work for up to 20 hours per week while school is in session, and there is no limit on the number of hours an international student can work during recognized school vacations.”

      Our closest competitor ie Australia does exactly that. If we are competing for a chunk of that business then we would have to offer a similar incentive. It is called competition, if you are not aware, for that $4 billion business.


      • Yep, countries attempt to compete with all sorts of insane subsidies and restrictions – export incentives (in days gone by), tariffs, film subsidies, and bundling work rights/residence access with selling export education. Doesn’t make any of them good policy for other countries or for us.

        One glimmer of hope in the minor leaders debate on TV3 the other day was when they were asked who would like to cut back or abolish film subsidies, most of the leaders raised their hands to agree.


  4. Unfortunately Bill English does not have the same gift of the gab that John Key has. Key would have been a lot better prepared than Bill. Bill knows the questions that is being asked but did not have the answers that John Key would have had.


  5. The debate was disappointing – if you could call it a debate

    First – Hosking kept interrupting and talking over the top of the candidates – the qualities of a good moderator is to ask the question and sit back and let the candidates answer – he couldn’t help himself

    Bill English never answered half the questions put to him but deflected and bloviated with a deluge of meaningless data – and Hosking let him get away with it. One example was Hosking taking English to task about 9 years of knowing our rivers are un-swimmable and what he has done about it and English went into a long meaningless discourse about measuring the rivers – today did some fact checking and find that what they have done is alter the measurement benchmark of E.coli from 260 to 540 ppm – and that’s all they had done – simply change the rules and say how good we have done

    Check that here

    Much of Bill English’s contribution to the debate was to lie

    Liked by 1 person

  6. Housing is the issue that goes right to the heart of this election campaign. The public have lost trust with National due to denial of this real problem. They are sick of the lies and spin. This lack of credibility and trust is impacting on how all of National’s policies are perceived. A tipping point has been reached.

    The voters can see in Jacinda a talented politician who passes the basic competence test and who stands for generational change, while Bill English stands for last generation thinking.

    Bill on housing is still defending his thinking. There is no acknowledgement that what the country is doing on housing is not working. He is a old-school, conservative, status quo guy and that is not what NZ needs. Bill’s housing story doesn’t add up -it doesn’t make sense. Frankly it is pathetic.

    Bill English claimed in the leaders debate that NZ would build 200,000 houses in the next 6 years and conveyed a message that there is nothing to worry about, that the housing crisis has got better under National. Mike Hoskings rightly pulled him up on the fact NZ is not building enough to house NZ’s population growth.

    But Mike didn’t state it in the most damaging way. Which is that the net increase in housing stock is even less than the consenting rate, which already is not enough to house population growth.

    To quote CoreLogic;

    “Our own analysis has shown that whilst there were roughly 10,000 dwelling consents in Auckland in 2016 (and 9,000 in 2015), the net increase in stock was only 6,000. A key contributor to this difference is the necessary reality of urban renewal which requires a property, or properties, to be demolished in order to build more multi-unit properties…”

    Given Auckland’s average housing occupancy rate of 3.0 people per household, a net increase of 6,000 residential dwellings will only house 18,000 people. Yet Auckland is growing by 45,000 to 50,000 people a year.

    It is this fact that is driving homelessness and overcrowding in Auckland, with all its awful social and economic consequences, such as third world poor housing childhood illnesses that the NZ Herald reported on a couple of days ago.

    National and Bill English do not have the answers. Bill English is not a policy genius. He is in denial. It is my belief that John Key threw Bill a hospital pass when he gave up the Prime Ministership and for a second time Bill will lead National into defeat.


  7. Your 14 year old son has no subtlety in his thought processes. He may have to study maths and physics.

    I think the word exploitation was mentioned next to foreign students but delivered with the emotional weight of a feather.


    • Sadly, i suspect there aren’t many votes in “exploitation” of foreigners. Ardern seems v keen to play down the immigration policy, to an extent that a) one wonders if they’d have adopted it if she had been leader then, and (b) to what extent, if they win, they will actually follow through. They lack a strong narrative to address both the economic, housing, and social issues around immigration adequately.


      • A few minutes ago I checked Wikipedia to see it slavery was significant in electioneering before the American civil war. It was but this comment struck me: “”Most northern Democrats, represented by Stephen Douglas, were middle-class farmers who were not antislavery but did not want to go west and compete with slave labor or, frankly, be around African-Americans.””


      • NZFirst crashed their own voter base by appointing the very first chinese migrant on their Party List. I thought it was rather silly for a party that sells itself as anti migrants to then decide to chase the migrant votes.


  8. That chart of earnings vs productivity is a real puzzle. I am surprised that earnings have been well ahead of productivity since 2001. It seems that either there is a data measurement error, or a historic shift in favour of labour share of income. It is not as though unemployment has been at 4% for the last few years.


  9. There has been an increase in the labour share of earnings in NZ since around 2001 (see my other couple of posts of the last week or so). I should note that when I did the comparisons of nominal wages vs nominal GDP per hour worked (both better measured than the reals) the gap is smaller, but still there. That indicates that part of the explanation is the rising terms of trade – which support higher real earnings despite no commensurate productivity gain in productivity.

    As for the rest, I don’t know. I put the (SNZ) numbers out there partly to solicit pushback or reaction. But if I were Bill English I’d be having someone dig into it smartly and using it for all its worth. Or – since this is politics – just using it anyway. He tried last night, but he didn’t have numbers at his fingertips.


  10. “…the Leader of the Opposition seemed content to concede that the economy was in good shape. “Relentlessly positive” I suppose.”

    Yes, I do think she might have qualified that statement by saying that productivity had flat lined… but even so the praise for what is (to my mind) a very tenuous economic situation did seem overly gracious to me. The TSY PREFU seemed a sort of oddly veiled ‘warning shot’.

    Perhaps Jacinda Ardern decided not to scare the horses – given if you start pointing out all our potential forward frailties then you bring your own proposed spending programme into question.

    I wonder whether both parties have constrained themselves by their future debt forecast/reduction policies – which is a bit limiting when you are at pains not to project increased revenue/income.


  11. I think ‘construction’ is generally thought of as a sector that has (historically) exhibited low labour productivity growth rates, yet, there is a urgent need for more houses: if roughly right, a NZ government that achieves growth in the housing stock could face accusations of a failure to materially lift productivity growth…


  12. Construction activity is quite high at present (between Chch and population growth) and a substitution towards that sector probably does explain something of the poor productivity record in recent years. Chch was unavoidable. The huge surge in the population wasn’t.

    (As it is I doubt we’ll see a huge new surge of building. To see that would require serious effort to collapse the price of urban land which – because housing would be more affordable – would generate new market-led building activity. I don’t see any political appetite for doing that.)


  13. …not to mention the impact of falling land/house prices on bank capital positions – a riddle (and not just for NZ): how to deflate an asset price that courts the lowest ‘risk weight’ outside a domestic government bond/central bank reserve? beats me….

    I took a look at this series “Full-Time Equivalent Employees by Industry (ANZSIC06) and Sex (Qrtly-Mar/Jun/Sep/Dec)” – no idea if it is useful data but between Q2’12 and Q2’17, the three sectors with the largest absolute increases were ‘Construction’, ‘Professional, Scientific, Technical, Administrative and Support Services’ and ‘Accommodation and Food Services’: seem labour heavy I guess…?


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