Something a bit odd in the data

I haven’t had time to look closely at last week’s GDP data, but as a last post for the year I thought I’d have a very quick look at the productivity (real GDP per hour worked) numbers that the various recent SNZ releases (national accounts and HLFS) suggest.

Over the years, I’ve often used as a proxy – SNZ not publishing an official series – a measure calculated by averaging the two quarterly GDP measures and dividing them by (an index from) an average of hours worked from the HLFS and hours paid from the QES. But in periods of lockdowns you really don’t want to be using hours paid, because things like the wage subsidy schemes were designed to get people paid even if they weren’t able to work, or their firm wasn’t able to generate much output. So in this chart I’ve simply used the average of the two GDP measures and the HLFS measure (self-reporting respondents) of hours worked.

This one starts from back just prior to the 2008/09 recession. As you see, the decade or so leading up to Covid wasn’t a good time for labour productivity growth in New Zealand (something not much more than 0.5 per cent per annum). And then came Covid and all the disruptions (and policy stimulus).

prod dec 21

Here is the same chart starting just prior to Covid (2019Q4).

prod dec 21 2

Perhaps unsurprisingly there has been quite a lot of variability in this measure of productivity, in ways that really don’t make a great of sense (to me).    There is always some variability –  one reason for using average measures –  but you can see from the first chart that the last couple of years look quite different, so far.  That “so far” is important, as there will be revisions to the GDP numbers for several years to come –  although none to the hours numbers (and who really knows how people were answering in lockdowns).

But if you believe these numbers –  and I recommend that you don’t –  we appear to have found the elixir of New Zealand productivity growth.  First take a global pandemic, then shut the borders, ease monetary policy, throw lots of government money at things, mess up the housing market further, compound it all with huge uncertainty from month to month (sometimes week to week).

Something just doesn’t ring true.  Sure, people find smart ways of doing things from home, but generally you’d have to assume that if the new ways were so great as to be better than what went before in 2019 they’d have been done then.  And no doubt macro policy has given a big boost to overall demand, activity, employment and hours….but this is a productivity measure, and whatever the boost was you’d normally think it would lift demand for people who on average were less productive than what went before.

There are always averaging effects –  in lockdowns perhaps some of the least productive people are disproportionately those who can’t work (waiters, motel cleaners etc) –  but….the picture was already looking surprisingly strong in Q2 this year, when there were hardly any domestic restrictions.

I just don’t believe that the picture represents reality, and that somehow productivity growth has –  after all these decades – started to accelerate.  There have been no micro policies working in that direction –  rather the opposite –  and no one really supposes that forcing businesses not to interact with overseas customers and suppliers etc face to face is good for medium-term productivity.  Add to that all the supply chain problems –  even the small weirdness that USPS no longer delivers to New Zealand –  and it suggests we should be pleasantly surprised if the level of labour productivity now is not lower than it was two years ago.  It just doesn’t make sense to think it is so much higher.  All else equal, the GDP estimates –  and that is all they are, in tough times for measurement and estimation –  look too high.

On which note, I will end the blogging year.

It has been a year of many fewer posts than in most since the blog began.  That was largely down to me getting a cold back in May 2020 from which I never fully recovered, graduating into what the doctor eventually diagnosed (labelled as) chronic fatigue syndrome.  By the standards of what one reads or hears of other people I had a mild version, but for long periods that meant I wasn’t good for much beyond the day to day basics, and sitting in front of a screen for even half an hour was at times astonishingly draining.  An attempt to walk much further than round the block could knock me back, sometimes for weeks.  I’m still not 100 per cent –  still need naps most afternoons – but seem to getting close; perhaps 90 per cent of normal, which is a considerable relief all round.

Having said that I don’t suppose I will drift back into a routine of a post each week day. Posts two or three times a week, supplemented with charts/links on Twitter, seems to be a useful and workable model for now.

Reviewing immigration policy

The Productivity Commission has been charged by the government with reviewing immigration policy with a view to identifying “what working-age immigration policy settings would best facilitate New Zealand’s long-term economic growth”, with a specific emphasis on productivity.

The draft report came out in early November, and I wrote a couple of sceptical/critical posts on it (here and here). The Commission invited submissions on the draft report (submissions close on Friday) and I’ve just lodged my submission. The full text is here:

Submission to the Productivity Commission inquiry on NZ immigration policy Dec 21

Most of the material in my submission will be familiar to regular readers, so I’m not going to quote extensively from it here. My overview was as follows:

There are plenty of individually interesting bits of material in the report (and supporting working papers) but overall, I’m left with the impression that the Commission has not yet done adequately what was asked of it. Specifically, in the Terms of Reference for the inquiry, you are invited to “explore what working-age immigration policy settings would best facilitate New Zealand’s long-term economic growth and promote the wellbeing of New Zealanders”, and in the next paragraph the connection to improving productivity is explicitly highlighted. Your draft report seems to touch on many of the more-detailed points listed in the Terms of Reference, but does not sufficiently stand back to evaluate the way in which immigration policy has (or has not) been contributing to productivity growth and material
living standards of New Zealanders.

Doing so well would require at least a pretty comprehensive review of New Zealand’s experience with large-scale non-citizen immigration over recent decades (arguably informed by the earlier post-war large scale immigration experiences that ended in the 1970s), including recognising that our approach to immigration policy has been something of an outlier among advanced countries, occurring against the (also unusual) backdrop of a very large net outflow of our own citizens. Without something of that sort, informed too by relevant overseas experiences and by a detailed engagement with the stylised facts of New Zealand’s dismal productivity record (recognising that the scale of New Zealand’s
immigration policy structural “intervention” has been huge), it is difficult to see how you can reach a view on what future immigration policy would be most suited to maximising, all else equal, New Zealand’s specific economywide productivity prospects. Moreover, nothing at all in the report seriously engages with the literature on economic geography, surely a startling omission when New Zealand immigration policy involves inviting large numbers of people to relocate to the most remote outpost in the advanced economy world, with the policymakers responsible claiming to have had explicit economic motivations for the policy.

Consistent with these omissions, two of the three highlighted Preliminary Recommendations are primarily process oriented, and the third is really a second-tier issue around absorption capacity. Other suggestions, some sensible, some questionable, play around the edges of the issue, perhaps focused simply on refining something like the last decade’s status quo. None gets to the heart of the issue: what sort of immigration policy should New Zealand run in future, if governments were interested in maximising the productivity and income prospects of New Zealanders?

The rest is there for anyone interested.

I had a quick look earlier in the week through the submissions the Commission had already received. The one that most caught my eye was a second submission by someone called Mike Lear (he’d already made a submission prior to the draft report). I don’t know who Lear is, although I deduce from his submission and this footnote that has had some past exposure to economic analysis and economic policy issues.

34 When I started work in the Department of Industries and Commerce in 1972 (in the newly formed
Productivity Centre!) I was told by the most senior person in the department responsible for overall industry policy that New Zealand should aim to be the Switzerland of the Pacific region for machine tools.

It is a very well-written submission, almost certainly easier to read than my own. Much of it represents a fairly trenchant championing of the “Reddell hypothesis” (the idea that our large-scale non-citizen immigration policy has detracted from New Zealand’s productivity performance) and point by point pushback on various points made (or ignored when they should have been made) by the Commission in the draft report. I don’t agree with every line of his submission, even where he is writing about my ideas, but it is a particularly clear and useful articulation of the arguments and identifies numerous issues that the Commission really needs to grapple with before publishing a final report next year.

Here is his Introduction

lear 1

lear 2

It will be interesting to see what the Commission comes up with in the final report. There is an opportunity to do a really valuable report standing back and asking how best this major structural policy intervention can contribute to improving our dismal economic fortunes. Or the Commission can keep to where the draft report got to, and focus mostly on process issues and tweaks (some sensible, some not) to the (pre-Covid) status quo. The former seemed to be what the government invited the Commission to do when it set out the Terms of Reference for the inquiry.