Productivity, Productivity Commission, and all that

I’ve written various pieces over the years on the Productivity Commission, both on specific papers and reports they have published, and on the Commission itself. I was quite keen on the idea of the Commission when it was first being mooted a decade or so ago. There was, after all, a serious productivity failure in New Zealand and across the Tasman the Australian Productivity Commission had become a fairly highly-regarded institution. But even from the early days I recall suggesting that it was hard to be too optimistic about the long-term prospects of the Commission, noting (among other things) the passing into history of the early Monetary and Economic Council, which had in its day (60s and early 70s) produced some worthwhile reports. In a small, no longer rich, country, maintaining critical mass was also always going to be a challenge, and agencies like The Treasury might be expected to have their beady eye on any budgetary resources allocated to the Commission, and on any good staff the Commission might attract or develop (a shift to another office block at bit further along The Terrace was unlikely to be much of a hurdle).

What I probably didn’t put enough weight on in those early days was the point that if governments weren’t at all interested in doing anything serious about New Zealand’s decades-long productivity failure, there really wasn’t much substantive point to a Productivity Commission at all, unless perhaps as something to distract the sceptics with (“see, we have a Productivity Commission”).

Ten years on, it isn’t obvious what the Commission has accomplished. There have been a few interesting research papers, some reports that may have clarified the understanding of a few policy points. But what difference have they made? Little, at least that I can see. Is the housing market disaster being substantively addressed? Is the state sector better managed? Is economywide productivity back on some sort of convergence path? Not as far as I can tell. Mostly that isn’t the Commission’s fault, although my impression is that the quality of the reports has deteriorated somewhat in recent years. But if politicians don’t care about fixing what ails this economy, why keep the Commission? It might be no more pointless than quite a few other government agencies and even ministries, but they all cost scarce real resources.

For the last 18 months I’ve been looking to appointment of the new chair of the Commission, replacing Murray Sherwin who has had the job for 10 years, as perhaps one last pointer to the seriousness – or otherwise – of Labour about productivity issues. There wasn’t much sign the Minister of Finance or Prime Minister cared much at all – or perhaps even understood the scale of our failure – but just possibly they might choose to appoint a new chair of the Productivity Commission who might lead really in-depth renewed intellectual efforts to address the failure, perhaps even in ways that might, by the force of their analysis and presentation, make it increasingly awkward for governments (Labour or National) to simply keep doing nothing. I wasn’t optimistic, partly because I’d watched Robertson and Ardern do nothing for several years, but also because – to be frank – it really wasn’t clear where they might find such an exceptional candidate even had they wanted one.

But then they removed all doubt last week when they announced the appointment of Ganesh Nana as the new chair. There is a strong sense that he is too close to the Labour Party. If that wasn’t ideal, it might not bother me much – especially given the thin pickings to choose a chair from among – if it were matched with a high and widespread regard among the economics and policy community for his rigour and intellectual leadership, including on productivity issues. Or even perhaps if he knew government and governent processes inside out (Sherwin, after all, was a senior public servant rather than himself being an intellectual leader). I don’t suppose the Nana commission is simply likely to parrot lines the Beehive would prefer – and can imagine some of Nana’s preferences being uncomfortable for them from the left – but this is someone who has spent 20+ years in the public economics debate in New Zealand, from his perch at BERL, and yet as far as I can tell his main two views of potential relevance are that (a) inflation targeting (of the sort adopted in most advanced economies) is a significant source of New Zealand’s economic underperformance, and (b) that a much larger population might make a big difference (notwithstanding use of that strategy for, just on this wave, the last 25 years or so.

Then there was this bumpf from the Minister’s press statement announcing the appointment

Ganesh Nana said he is excited to take up the position and looks forward to working with other Commission members and staff to focus on a broad perspective on productivity.

“Contributing to a transformation of the economic model and narrative towards one that values people and prioritises our role as kaitiaki o taonga is my kaupapa.  This perspective sees the delivery of wellbeing across several dimensions as critical measures of success of any economic model.

“Stepping into the Productivity Commission after more than 20 years at BERL will be a wrench for me and a move to outside my comfort zone.  However, this opportunity was not one I could ignore as the challenges facing 21st century Aotearoa become ever more intense.

“The role and nature of the work of the Commission is set to change in light of these pressing challenges.  I am committed to ensure the Commission will increasingly contribute to the wider strategic and policy kōrero,” Dr Nana said.

Whatever that means – and quite a bit isn’t at all clear to me – it doesn’t suggest any sort of laser-like focus on lifting, for example, economywide GDP per hour worked, in ways that might lift material living standards for New Zealanders as a whole.

(And then there was the unfortunate disclosure in the final part of the Minister’s press statement that the government has agreed that while functioning as a senior economic official, paid by the taxpayer, Nana is to be allowed to retain his almost half-share in his active economic consulting firm BERL. There is the small consolation that the Commission itself will not contract any business with BERL, but that should not be sufficient to reassure anyone concerned about what is left of the substance or appearance of good governance in New Zealand.)

A couple of weeks ago the Productivity Commission released a draft report on its “Frontier Firms” inquiry. The Commission does not control the inquiries it does – they are chosen by the government – and this one also seemed a bit daft to say the least, since “frontier firms” always seem much likely to arise from an overall economic policy environment that has been got right, rather than being something policymakers should be focusing on directly. But the Commission might still have made something useful, trying to craft something a bit more akin to a silk purse from the sow’s ear of a terms of reference.

I had thought of devoting a whole post to the draft report, and perhaps even making a formal submission on it, but since the report will be finalised under the Nana commission that mostly seems as though it would be a waste of time. And there is the odd useful point in the report, including the reminder that our productivity growth performance has remained dreadful by the standards of other modestly-productive advanced economies, and that we have relied on more hours worked, and the good fortune of the terms of trade, to avoid overall material living standards slipping much recently relative to other advanced economies. Productivity growth – much faster than we’ve achieved – remains central to any chance of sustainably lifting those material living standards and opening up other lifestyle etc choices.

But mostly the report is a bit of a dog’s breakfast. Just before the draft report was released the Commission released a short paper on immigration issues that they had commissioned. I wrote about that note, somewhat sceptically, at the time – sceptical even though the gist of the author’s case might not be thought totally out of line with some of my own ideas. It turned out that the Fry and Wilson work was the basis for the Commission’s own discussion of immigration in the draft report, a discussion that neither seems terribly robust nor at all well-connected to the “frontier firms” theme of the report. Perhaps the RSE scheme has problems, perhaps some low-skilled work visas are issued too readily, but…..apple orchards and vineyards didn’t really seem to be the sort of “frontier firms” the Commission had in mind in the rest of the report.

Perhaps my bigger concern was about their attempts to draw lessons from other countries. They, reasonably enough, suggest that there might be lessons from other small open advanced economies, perhaps especially relatively remote ones. But then they seem to end up mostly interested in places like Sweden, Finland, Denmark and the Netherlands – all of which are in common economic area that is the EU (two even with the euro currency, most with no disadvantages of remoteness). I don’t think there was a single reference to Iceland, Malta, or Cyprus. Or to Israel – that country with all the high-tech firms and a productivity performance almost as bad as ours. And – though it might not be small, it has many similar characteristics to New Zealand – no mention at all of Australia. Remote Chile, Argentina and Uruguay get no mention – even though two of those three have had strong productivity growth in recent times – and neither, perhaps more surprisingly, do any of the (mostly small) OECD/EU countries in central and eastern Europe, many of which are now passing New Zealand levels of average labour productivity.

There wasn’t any systematic cross-country economic historical analysis or a rigorous attempt to assess which examples might hold what lessons for New Zealand. Instead, there a mix of things that might be music to the ears of a government that wants to be more active, and perhaps to punt our money again on the emergence of some mega NZ excellent firm(s) – without any demonstrated evidence that it (or its officials) can do so wisely or usefully – plus the odd thing that must have appealed to someone (eg the material on immigration – a subject that might still usefully warrant a full inquiry of its own, if the government would allow it, and when better than when we are in any case in something of a hiatus).

This will probably be the last post for this year, so I thought I’d leave you with a couple of charts to ponder.

The first is a reminder of just how little we know about what is going on with productivity – or probably most other aggregate economic measures – right now. As regular readers will know, I have updated every so often an economywide measure of labour productivity growth that averages the two different real GDP series (production and expenditure) and indexes of the two measures of hours (HLFS hours worked, QES hours paid).

mix of econ data

First, there is the huge difference in the two GDP measures. Whichever one one uses – but especially the expenditure measure – suggests a reasonable lift in average labour productivity this year (on one combination as much as 5 per cent). In the period to June there was an argument about low productivity workers losing their jobs, averaging up productivity for the remainder, but how plausible is that when hours are now estimated to be down only 1% or so on where they were at the end of last year (much less than, say, the fall in the last recession)? And thus how plausible is the notion of an acceleration in productivity growth given all the roadblocks the virus, and responses to it, have put in place this year. And although SNZ’s official population estimates have the population up 1.5 per cent this year (to September), if we take the natural increase data and the total net arrivals across the border data, they suggest a very slight drop this year in the number of people actually in New Zealand. I’m not sure, then, which of the economic data we can have any confidence in, although I’ll take a punt that the single least plausible of these numbers is the expenditure GDP one, and any resulting implication of any sort of real lift in productivity this year. SNZ has an unenviable job trying to get this year’s data straight.

But, of course, the real productivity challenge for New Zealand was there before Covid was heard of, and most likely be there still when Covid is but a memory. As we all know, New Zealand languishes miles behind the OECD productivity leaders (a bunch of northern European countries and the US), but in this chart I’ve shown how we’ve done over the full economic cycle from 2007 to 2019 relative not to the OECD leaders but to the countries that in 2007 either had low labour productivity than we did, or were not more than 10 per cent ahead of us then. For New Zealand I’ve shown both the number in the OECD database, and my average measure (which has the advantage of being updated for last week’s GDP release).

productivity 07 to 19

Whichever of the two NZ measures one uses, we’ve done better only than Greece and Mexico. Over decades Mexico has done so badly that the OECD suggests labour productivity in 2019 was less than 5 per cent higher than it had been in 1990. Even Greece has done less badly than that.

(As a quick cross-check, I also looked at the growth rates for this group of countries for this century to date. We’ve still done third-worst, beating the same two countries, over that period.)

It is a dismal performance. And there isn’t slightest sign that our government cares, or is at all interested in getting to the bottom of the problem, let alone reversing the decades of failure. Talking blithely about alternative measures of wellbeing etc shouldn’t be allowed to disguise that failure, which blights the living standards of this generation and the prospects of the next.

(And, sadly, there is no sign any political opposition party is really any better.)

31 thoughts on “Productivity, Productivity Commission, and all that

  1. The real comparator countries NZ needs to be compared with aren’t Sweden, Finland, Singapore… its Portugal, Greece, Argentina.

    It’s not hard to be pessimistic. New Zealand’s leaders are lost in a maze and they don’t even realise they’re in it. They just do what’s expedient politically for the next 3 months, like throwing Adrian under the bus on housing as Grant Robertson did three weeks ago, which was a disgusting display of politicking at the expense of good policy making.

    Liked by 4 people

      • Great news for productivity that Tiwai Point Smelter will be kept operating for another 4 years. The alternative would be a loss of highly skilled jobs and replaced with cleaning jobs for tourists with the consequence of loss of productivity with another industrial complex closed..

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      • NZ Refinery will have to be the next industrial complex that the government needs to save to keep productivity. Loss of NZ Refinery will be a loss in productivity. Grant Robertson and Jacinda Ardern needs to stop yapping stupidly about productivity and take action to improve productivity. Keep our industrial industries operating and growing. That is how productivity is gained.

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  2. I’ve little confidence in anyone that chooses to lace an English language text with Maori words when there are far better options available in English itself. English has a vast choice of precise and widely known words and phrases to replace such nonsense as the nebulous and ridiculous “kaitiaki o taonga is my kaupapa”.
    Looks like someone wanting to obfuscate rater than communicate or trying to obtain woke brownie points to me.
    Regrettably we have a government that rewards and values this sort of drivel.

    Liked by 5 people

  3. Per capital productivity has fallen for decades and we are no nearer the cause or remedy. Their has been no insightful research nor light shine from any commission. You yourself have not come up with any actionable policies or processes. Travelling the world it is not obvious why labour productivity in some countries are statistically better than NZ. We obviously have deadweight costs in the system because it doesn’t appear in the frontline with flexible contracting and skinny labour rosters. It seems capital investment is low but at some point rational behaviour should have emerged if the case was compelling.
    So your challenge is to identify the ‘actual problem’ and give us a ‘first principle’ foundation on which we can improve the situation in a timely fashion.

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    • Yes Chris, that is exactly what the (so called) productivity commission should be considering, Michael has had plenty to say on this, identified the problems and solutions.

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      • Chis Hampton, Productivity is not rocket science. It is a very simple math division even my 11 year old can give an answer to. The cause of our productivity malaise is actually very simple. For every factory that we shut down instead of investment in automation or robotics impacts adversely on economic productivity. For every cow we add to a farm increases economic productivity because we do not count the 10 million cows to generate our meat and milk industry. Economic productivity only counts monkeys but excludes cows.

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    • You may have disagreed with my diagnosis and prescriptions, but there is plenty about them on here (incl in the papers and speeches section). I gather than in the upper reaches of the economic bits of the public service they still sometimes refer to the so-called “Reddell hypothesis”.

      Liked by 2 people

      • The Reddell Hypothesis states that NZ developed it’s resources (reaching a peak of productivity/efficient use of those resources) but kept adding people. When NZrs headed to Australia in search of better opportunities the government brought in workers instead of putting pressure on those firms to innovate.

        NZ is too far from other countries to be a major manufacturing center given that complex manufacturing requires multiple parts.

        Increased population means more money needed for infrastructure which affects the cost of capital for firms and the exchange rate.
        …………..
        When I drove through the South Island I could see Tearooms that had become redundant as cars and roads got better. Also you don’t look at green hills covered in sheep and say there should be something else there. Such things are possible as when the first wells were drilled on the Canterbury Plain. Also when the West Coast lost some coal mines a Mayor talked about the “huge” tourism potential. Definitely is some but not huge.

        It’s a pity we couldn’t fisk the true ideologies of our leadership and see who their loyalty was to. Key said he wanted us to be more confident outward looking. When confronted with a statement about immigration by Kerry McDonald he showed no emotion just “we don’t agree with that”.

        I notice Spoonley talking about post Covid. He touches on Queenstown (they have big problems) and then he is all over the Filipino dairy workers in Southland. What about real wages falling in tourism and hospitality and the domination of the industry by Chinese. In other words it has grown on the back of migration and made us poorer.

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      • The Reddell hypothesis puts into the category of primary production and not good for anything else. Innovation and creation comes from “We can and will do better” not from “The grass is always greener next door” or “I am just not good enough”.

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      • GGS
        Yours’ sounds like the Julian Simon Hypothesis: if a group of people are on an asteroid without air, the price of air goes up leading to innovation and (hence) an atmosphere?

        Liked by 1 person

      • Or you look for water H20 and you split H from O and get oxygen to breathe and hydrogen to burn. Not impossible just expensive to make or you import breathable air. Or like many young highly skilled kiwis you go look for an asteriod with an atmosphere.

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      • The asteroid atmosphere conundrum raised in this thread is interesting.

        We cannot make O2 and H out of water, even if we found some, because our NZ Green 1 spacecraft is solar and wind powered. No sun no wind here and a nuclear power plant was banned under both law and misplaced hysteria and political points scoring.

        Furthermore your NZ Green 1 spacecraft has no scientists or engineers on board because science and maths were hard at school. So your crew is really good at kapa haka, te reo and diversity studies. You will be lucky if they can read properly. Your crew will be social workers, mental health counsellors, maybe a lawyer and some trade unionists.

        Some young astronauts may want to leave for another asteroid, but they may not get visas given they have no tradable skills. By the way, any scientists and engineers that may have been on board by accident have already left…

        Liked by 1 person

  4. Another captain for HMNZS ineffective.
    Productivity is a joke if you add new holidays, double sick leave, up the minimum wage to pay more for doing the same thing, pay millions to settle real or imagined grievances, pay single women to have children, give money to families (“working for families” tax-back), bloat the public “service”, over- tax business, make energy expensive, bog any initiative in endless consultation, have kids leaving school not knowing how to read or do maths properly, pay millions in carbon blackmail charges…..
    Need I go on?

    Liked by 4 people

    • Piet Beukman, in the context of productivity those giveaways do not really matter as it is only a tiny fraction of what a human possibly do in the time he is able to work anyway. These days it is computer aided tools that do most of the work. I used to manage a team of 10 accountants that spend all their time with pencil and rubber working on forecasting in a public listed company. These days I do forecasting on an excel spreadsheet myself. The next productivity driver would have to be robots or AI robot automation. Anything else just will not deliver as we have pretty much optimised computerisation. As we have been shutting down our factories none of these technology advances would help anyway until those robots get smart enough to replace humans in Aged and health care facilities and hospitality industries.

      Liked by 1 person

      • The problem is that the other 9 you got rid off(wisely) have gone away to teach Maori basket weaving or some such other dribble thus diluting the productivity effect that you intended. Worked for your company but not for the country.
        either they went somewhere that the productivity fell or remained status quo or they went to a place which lowered the productivity because someone still paid them wages., maybe not as much but the hours worked remained for little extra reward in terms of our production measured in dollars received form sals.
        So while many of us work towards greater productivity, as you have, this results in a no-change position overall for NZ.
        And that’s the rub, productivity per capita.

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  5. Michael,

    The Productivity Commission chaired by Sherwin (who was a hopeless DG of Agriculture) has spent lots of time in the throes of what to do as we reduce emissions, which will be disastrously expensive and which will have zero effect on climate etc. The Commission has produced little of value except doorstop reports, which few if anyone will read.

    Cheers,

    Have a good Christmas,

    Jock

    Jock Allison,

    9 Arthur Street,

    Dunedin, 9016

    Dunedin

    Phone : 64 3 4772903

    Cell Phone 64 21 363337

    email : jock.allison85@gmail.com

    Like

    • The government can only do what its Treasury and economic experts recommend. Unfortunately our Treasury and economists are blinkered and are very biased towards keeping Primary production as our top industries. Many grew up on farms and are keen to protect their family roots and heritage at all costs. Unfortunately we are already at Peak Primary production.

      Very simple, if you want productivity you need robot automated factories, or financial centres or smarter AI robots for our aging and health and hospitality sectors. The government will chuck billions in subsidies in culling cows or clearing diseased Vineyards but they will not spend the same billions to protect and to keep its factories.

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  6. Poor productivity , per person or capital efficiency reflects an underlying inflation where more people are required to do the same job.This is largely driven by ever increasing regulation.
    Example of this can be simply seen by filling potholes in the road.Years ago one man and a shovel did this. Now it requires far more staff on the job plus diggers,traffic managers and let’s not forget the bureaucracy supporting them in the office!
    Capital efficiency is not possible with growing demand by extra workers..

    There have been huge efficiency gains in the private sector but they are being rapidly swallowed up by the regulatory tsunami .And the regulators are now on average better paid!

    Productivity is being crowded out.

    Liked by 3 people

    • Got a new Maori lady turn up to look after mum. Sorry can’t bathe her, sorry can’t clean her excrement. Sorry, Don’t know how. So she sat for an hour doing nothing and went off and said she will not be back. Looks like we are going to need those migrant labour.

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      • I didn’t realise that it isn’t just demographics, it’s a longevity issue. But immigration isn’t the answer because when Natalie Jackson models it tweaking the inputs to maximum by 2030 there isn’t much change in the proportion of working age people. In a sense longevity is an illness. In a man called horse the elderly mother was sent of to die on a hill top. I may be strange but when Covid came I thought it could be the best thing for society. Life should be short and sweet not drawn out and marginal (I’m in the upper age group). The key isn’t in the economic but in seeing society as a whole; that’s what’s missing in the “cosmopolitan 21st century country”.

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      • The stupidity ….

        Norman Kirk and Labour’s compulsory NZ Super Scheme was underway, when Muldoon subsequently scrapped it and promised everyone super without having to pay for it in advance

        Had the scheme continued everyone would would have a retirement fund

        Now, from 2010 onwards the mantra has been we now need mass immigration to fund our retirements
        That immigration comes at a huge social cost

        Genius

        Liked by 1 person

      • My mums care is fully funded by ACC. I must admit ACC care is first class, no doubts about that. It is not funding but the availability of locals prepared to provide the same level of care and the key is empathy that migrant labour provides.

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  7. Cause of Low Kiwi Productivity
    One of the Productivity Commission’s relatively recent reports [I think in the last year or so], attempted to list possible causes for lack of productivity gains. I eagerly checked each item looking in particular for one cause which I had noticed in SMEs. It wasn’t there. I could hardly believe it. This seems my first opportunity since then to raise it.
    My proposition is that over many years, people with good skills were attracted to overseas jobs. As an assumption, the Covid returnees suggest this may be correct. The smart ones are avoiding Covid altogether. At the same time, immigration brought in many people with much lesser skills. However, this latter group of immigrants did not generally become low level, or medium level managers.
    Instead, the appointments to these low and medium level managers were from other local sources for their willingness to stick to old style hierarchy command and control methods. Hence there was no particular need for being tertiary qualified or even mildly literate or of above average IQ.
    The result is lack of written procedures, ill-thought-out decisions, repetitive revision of even very recent decisions, countermanding older tried and tested decisions, ad hoc change upon change: generally, management by crisis. The low paid workers were required to double up on the work, in effect achieving 50% less productivity for that episode’s duration. That was followed by a return to normal productivity awaiting the next regular episode. It is possible that a lack of competition is partly at work.
    I suspect that much larger economies in UK, EU, and USA, are able to attract people of much higher IQ including many kiwis, and there may be much more competition. Hence, their better productivity. Companies are not of course obliged to lift productivity. What they don’t know cannot be implemented. They presumably don’t read available management information and don’t attend leading management courses. It seems that productivity cannot be lifted without government intervention to encourage better practices. If employment applies, I favour licencing. As usual with any ‘academic’ theory, further work is required to validate the proposition. Contributions to advance this new theory are welcome in this column.

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