Productivity growth – the key to future wellbeing

Dr Bryce Wilkinson
Insights Newsletter
6 April, 2023

Who really cares about the wellbeing of future generations? Those who do should care greatly about productivity growth.

Nothing really compares to productivity growth for making the good things in life more affordable.

Last week, Statistics New Zealand reported that labour productivity here grew at an average annual growth rate of 1.3 percent between 1996 and 2022. For Australia it was 1.9 percent.

What does this mean and how much does it matter?

What it means is that, on average, firms in Australia could afford to pay workers 63 percent more (relative to prices) in 2022 than in 1996. New Zealand firms could only afford to pay 40 percent more.

If that does not change, in 2055 workers in Australia could be earning three times what its workers were earning in 1996. Workers in New Zealand would earn fractionally more than twice their 1996 level.

Productivity growth matters because New Zealanders naturally want higher incomes. The daily open-ended demands for more money from government illustrate this. Income gaps must be closed, poverty alleviated, crime reduced, spending on arts, science, culture, crime, health and education boosted, infrastructure improved and the environment made cleaner.

Productivity also matters because workers who want higher incomes can move to Australia. That is not so good for all those clamouring for more money from New Zealand governments.

What is behind the difference with Australia? On the data, the big difference is that Australia is attracting more investment per worker. More capital per worker, if spent well, means higher worker productivity.

Specifically, capital per worker in Australia doubled between 1996 and 2022, whereas in New Zealand it only rose by 44 percent.

The implication is that New Zealand is more hostile to investment, and thereby worker productivity.

New Zealand’s restrictions on incoming foreign direct investment illustrate this hostility. The OECD ranks our regime as the most restrictive of its 38 member countries. By 2021, on UNCTAD’s figures, the accumulated stock of foreign direct investment in Australia was 60 percent higher per capita than New Zealand’s. Ireland had attracted over fourteen times more per capita than New Zealand.

The next government would do workers and future generations a favour by making our regime more attractive.

Stay in the loop: Subscribe to updates