Nathan McLellan
In the recent ‘Speech from the Throne,’ the National-led government stated its commitment to “build a productive and competitive economy.”
This pledge to boost New Zealand’s productivity comes in the context of the oft talked about income gap between New Zealand and other developed countries, like Australia; a gap usually measured by the difference in GDP per capita.
But why is this income gap important in the first place and what does it have to do with productivity?
Crucial factor
Boosting New Zealand’s income is crucial in supporting and fostering the type of vibrant society in which New Zealanders aspire to live.
For example, higher income provides opportunities for employment and the resources to buy more of the things we want. Higher income may also allow us to take more free time.
But as these examples suggest, pursuit of higher income contributes to our greater goals.
It is important that we do not lose sight of the fact that increasing our income is not an end in itself, but a means to other ends.
Lifting GDP
Nevertheless, raising New Zealand’s GDP per capita is important in pursuit of these greater ends. It is here that boosting New Zealand’s labour productivity is important.
This is because most of the income gap between New Zealand and other countries is due to labour productivity.
Take Australia for example. Although the exact numbers will vary depending on the data source used, New Zealand’s GDP per capita was around just 70% of Australia’s in 2012.
Almost all of that difference was due to the disparity in labour productivity.
It is a similar story when we compare ourselves to countries like Canada, UK and USA.
The Concept
But what is “labour productivity?”
At the individual level, your labour productivity is simply what you produce during a certain period. If you work in a cereal factory and you package 100 boxes of cereal per hour, while your co-worker packages 50 boxes, then you are twice as productive as your co-worker. Of course, you may be more productive than your co-worker because you may have a packaging machine, which goes to show that labour productivity is impacted by more than just your skill and ability.
When people talk about labour productivity at the level of an entire economy, they are usually referring to the average of what is produced in an hour by all workers.
When multiplied by the average number of hours worked by New Zealand’s population, this equals New Zealand’s GDP per capita.
All this means is that in order to close the income gap, we need to use our resources more productively rather than simply working longer hours.
It comes back to the classic phrase: working smarter, not harder.
Boosting our labour productivity therefore remains one of our main economic challenges if we are to live in the vibrant society that we aspire.
Nathan McLellan is Senior Researcher at the Auckland based Maxim Institute.
