Productivity and employment

With 30 seconds thought it is pretty obvious that if the least productive 10 per cent of our workforce simply dropped out and stayed home, then across the whole economy average GDP per hour worked would increase, all else equal.   All else equal, the productivity of any particular individual still employed wouldn’t change –  in practice it might well, as someone would still have to do the filing or the cleaning –  but the average would.

So far, so uncontroversial.  No one thinks it would be a sensible policy approach to lifting productivity to, say, bar such low productivity people from working.  Doing so would not only be inhumane, but it would make us, on average, poorer (output is still output, even if productivity of the marginal worker is below average).    In practice, of course, high minimum wages (relative to the market median), as in New Zealand, have exactly that effect –  pricing some low-productivity people (who couldn’t, at present, command a wage in the market at least equal to the statutory minimum.

But every so often in the last 20 years, as people have tried to grapple with New Zealand’s continuing poor average levels of GDP per hour worked, and the failure to achieve any convergence to the (now) richer members of the OECD, someone pops up with line “ah, but we are more effective than most in drawing in the low productivity members of our community, which will bias our measured average productivity (and productivity growth) downwards.

The latest example was in the Sunday Star-Times business section yesterday.

New Zealand’s track record on labour productivity may look worse than it is because a growing number of Kiwis are in work, the Productivity Commission says.

In fact, this wasn’t reporting any new Productivity Commission work.  Rather, one of the Productivity Commission’s senior staff had pointed the journalist in the direction of some interesting work done by able researchers at Motu a couple of years ago.  And, despite the implication readers (like me) may have taken from the headlines and the lead sentence (above), the research work related to a period 2000 to 2012, not to the period of nil productivity growth over the last five years.

It suggested annual productivity growth would have been about 70 per cent higher, averaging 0.24 per cent, between 2001 and 2012, instead of 0.14 per cent, were it not for a decline in skills associated with higher employment.   Motu estimated last year that the skill level of the average Kiwi worker fell by 1.8 per cent over the period as more people joined the workforce.

Again, despite the hyped lead-in (“70 per cent higher”) do note that the difference in these two (multi-factor) productivity growth rates cumulates over 11 years to a total difference of around 1.1 per cent.  Welcome, but not exactly game-changing.

Motu provided a nice non-technical summary  (page 3f) on what they’d actually done, using detailed data from the Longitudinal Business Database (LBD).

Productivity estimates are typically based on the quantity of labour used by firms to produce output. However, the characteristics of a firm’s workers also have an important influence on productivity, with different types of labour impacting differently on the technologies that firms adopt and their performance more generally. Because data on individual workers are linked to the data on firms in the LBD, it is possible to construct a measure of the quality of a firm’s labour force and measure the impact of this on productivity.

The measure of worker quality – which is derived from earnings data – reflects the bundle of skills, qualifications and experience of individual workers. As such, it picks up a broader range of worker attributes beyond qualifications.

Based on this measure, the average quality of the New Zealand work force declined slightly by 1.8% from 2001-2012…..

This somewhat surprising decline in the average quality of New Zealand workers reflects the net result of two opposing forces. First, average skills increased due to ageing (ie, greater experience) and rising qualifications. For example, the share of tertiary qualified workers grew from 15% to 25% while the share of workers with no qualifications fell from 19% to 14% between 2001 and 2013. At the same time, full-time equivalent employment increased strongly by around 15% (Figure 1). The large number of new workers who came into the labour market had, on average, lower skills than existing workers. This lead to a dilution in worker quality that more than offset the improvement in qualifications and experience.

They look like nice results.

But since many of the concerns around productivity growth in New Zealand relate to cross-country comparisons –  how have we done relative to the rest of the advanced world, and relative to common underyling global trends –  it might be worth looking at what has happened in other countries.    It would take a pretty big study to replicate the Motu project across, say, the OECD.   But we do have readily accessible data on employment to population ratios across the OECD, and we have that data for a longer period of time than just 2001 to 2012.

Our HLFS goes back to 1986.  Here is how New Zealand’s employment to population ratio has behaved since 1986.

employment to popn 25 Sep

Over the entire 30 year period, our employment to population ratio increased by 2.4 percentage points, which isn’t a lot.  It seems quite plausible that the effect Motu identified was present in the data as the employment to population ratio increases, from the trough in 1992 through to 2007.  But most of that effect will have been reversing the opposite effects resulting from the really sharp fall in the employment to population ratio (disproportionately low productivity workers, almost by construction) from 1986 to 1992.

And what about the international comparison?  Here is the gap between New Zealand’s employment to population rate and that in the median of the 22 OECD countries for which there is data for the whole period (almost all the “old” advanced OECD countries, and not the former Soviet bloc countries).

employment 2

In all but one year, our employment to population ratio has been above that of the median OECD country.    That doesn’t automatically mean we have been employing more low productivity people –  some systems make labour force participation of both parents of small children easier than others, and some systems penalise older people staying in workforce less than others –  but lets grant that some part of the difference may be that we manage to employ more of the less productive groups.   At the margin, that might explain a small part of the levels difference between our average productivity and that of these, mostly richer, OECD countries.

But two things to note:

  • the gap is smaller now than it was thirty years ago.  In other words, even if this “employing the less productive classes” story is some part of the levels explanation, it is almost certainly less of an explanation than it was 30 years ago.  And yet the real puzzle people have been grappling with is why, after all the reforms, we haven’t made any progress in closing the gaps over the last 30 years.   These compositioneffects don’t look as though they can help over the post-1984 period as a whole (useful as they might be for interpreting data for some individual sub-periods).
  • there has been no material change in the gap at all over the last decade, suggesting that this compositional story doesn’t offer any explanation for why from 2008 to 2015 we did no better than middling relative to other OECD countries (not closing the gaps), and since 2012 we’ve been among the very worst productivity performers, with no labour productivity growth at all.

As I’ve pointed out in several posts recently, average real GDP per hour worked in Germany, Netherlands and France is now around 60 per cent higher than that in New Zealand (even though historically all were poorer and less productive than New Zealand).  In 2016, employment to population ratios in New Zealand and Germany were identical (while those in Netherlands and France were lower).  But here is the chart showing New Zealand’s employment to population ratio less the average of the ratios of each of those three countries.

employment 3.png

Over the period for which observers have been struggling for an explanation of our poor productivity growth, our employment to population ratios have been falling relative to those in several of the leading, and most productive, European economies.

Compositional effects (around the skill levels of the labour force) just don’t look like a credible part of an explanation for why the level of productivity here is now so much below that in the leading OECD economies, or why no progress has been made in closing the gap, over the last 30 years or the last five.


Fossicking in election statistics

Well, that was a fascinating election outcome.

Listening to the coverage on Saturday night, I was interested in comments about how strong National’s performance was vying for a fourth term in government.  There didn’t seem to be many statistics behind the talk.

But it is worth bearing in mind that since 1935 –  when the domination of New Zealand politics by our  current two main parties really began – we’ve had 10 governments.  Two have lasted a single term, one two terms, four completed governments last three terms, and two governments lasted four terms. It seems to be an open question whether National will now be able to lead a fourth term government.  That means there really isn’t much data.  And, to some extent, MMP changes things –  minor parties are more important, and MMP governments have so far always involved multiple parties.

There has been talk that National’s (provisional) vote share this time (46.0 per cent) is higher than it was when they first took office in 2008 (44.93 per cent).   But ACT has never had anywhere to go but National, and never had any desire to go elsewhere anyway.  So at very least one should aggregate the National and ACT votes to look at the centre-right performance.

But I’d argue one should really go a bit beyond that.  The Conservative Party has come, came close in 2014 to entering Parliament, and then has largely gone again.  Not only did the Conservative Party campaign in 2014 as another potential support party for National, but realistically most of their voters in 2011 and 2014 are people (in many case conservative Christians) who would have otherwise, naturally or reluctantly, have voted for one of the other centre-right parties.

In this chart, I’ve shown three different ways of looking at how the centre-right vote has changed:

  • National + ACT party votes as a share of the total vote,
  • National+ ACT party votes as a share of the “used” vote (ie excluding the “wasted” party votes for parties that didn’t get into Parliament), and
  • National + ACT + Conservative party votes as a share of the total vote.

centre right 2

On each of those lines, the centre-right vote share has fallen quite a bit.  If anything, what the chart highlights is how well the centre-right did (and, I guess, how disastrously the left did) at the 2014 election.  In this election, the centre-right vote share –  the grey line –  has (on the provisional results) fallen by a full 5 percentage points.

And then I wondered how it had been in the 1960s.  The 1969 election was the last time a a party secured a fourth term.

national 60s

Now that looks more like a genuinely impressive performance – the governing party lifting its vote share in the election in which it gained a fourth term.   There had been industrial action at the time of the election which had hurt the Labour Party, but the previous three years had been a very tough time to govern.   Wool prices had collapsed (and with them the overall terms of trade), the New Zealand government had been forced into a devaluation in late 1967, and had borrowed from the IMF under a pretty stringent domestic austerity programme.  Things here had been tough enough that over the three calendar years 1967 to 1969 there was a small overall net migration outflow (the first such outflows since the end of World War Two). People can counter that the third party – Social Credit –  saw its vote share fall away, and both National and Labour gained. But in a sense that is the point: tough times like that are often when third parties, and main Opposition parties do well.  But National increased its vote share.

The other fourth term victory since 1935 was in 1946, when Labour secured a fourth term.  And here is how Labour’s vote share changed over its time in government.

Labour 1946

Again, going for a fourth term Labour managed to increase its vote share.   They’d seen off John A Lee’s rebel party in the 1943 election, and no doubt won back most of that vote, but again…that is the point.  Going for a fourth term after crises, war, and post-war controls and inflation, Labour increased it vote share (to 51.3 per cent).

I was also playing around with some other of the provisional results.  For all that the Greens have done pretty badly nationwide, it was striking how strongly they poll in the neighbourhoods I live and move in.    In (booths in) Island Bay itself 16 per cent, and in next door Berhampore 26 per cent (no wonder the new local Labour MP, and current Wellington deputy mayor, avoided answering questions about his approach to the cycleway).   In the whole Rongotai electorate  the Greens scored 17 per cent, and in next door Wellington Central (where James Shaw ran) 20.8 per cent.    Both those percentages are lower than in 2014 ( 26.2 in Rongotai and 29.5 in Wellington Central) but are still huge –  and conventional wisdom seems to be that the Green vote share will rise on special votes.  No wonder that, despite the fact that 70-80 per cent of submissions from residents favour scrapping the dreaded Island Bay cycleway (and certainly don’t want to spend millions more on it), the Wellington City Council seems set to pursue its green agenda anyway.

Finally, I was interested in whether there were any material differences in the party vote shares between advanced votes and those on the day.  I only looked at two electorates (again, Rongotai and Wellington Central) but this is what I found.



And Wellington Central

wgtn central

The differences aren’t huge, but they are there – at least in these two electorates, and in particular between the Greens and National shares. Given that advanced votes of those who enrolled at the same time as they voted still haven’t been counted, it would presumably offer some encouragement to the Greens.