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Capital Shallowness: A Problem for New Zealand?

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Author Info

  • Julia Hall
  • Grant Scobie

    ()
    (The Treasury)

Abstract

There is now substantial evidence that New Zealand’s overall rate of economic growth relative to Australia’s has been lower in part because of lower levels and slower growth in our labour productivity. This then requires us to explore why the labour productivity is lower in New Zealand. This paper explores the extent to which a lower level of capital per hour worked (or lower capital intensity) is associated with less output per hour worked in New Zealand. We find that the capital intensity in New Zealand has not been increasing as fast as in Australia for nearly 25 years. Between 1995 and 2002, lower capital intensity explains 70 percent of the difference in output per hour worked. Whereas the cost of labour relative to capital has been rising in Australia, it has fallen by 20 percent in New Zealand between 1987 and 2002. The relative price of labour to capital in New Zealand fell to 60 percent of the Australian value in 2002 after being comparable in the late 1980’s. It is to be expected that New Zealand enterprises would therefore tend to adopt less capital intensive production methods. Differences in capital intensity could also have arisen because the underlying production technologies are different even if the relative prices of labour and capital in the two economies had been similar. We explore this issue and find a similar response of capital intensity to changes in the wage rate relative to the return on capital for the economies as a whole. However when we exclude the mining sector we find that the responsiveness in New Zealand is about one half that of Australia. Whether there are impediments or greater uncertainty in New Zealand that limit the ability of firms to respond to economic signals as much as their Australian counterparts remain as possible explanations requiring further investigation.

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File URL: http://www.treasury.govt.nz/publications/research-policy/wp/2005/05-05/twp05-05.pdf
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Bibliographic Info

Paper provided by New Zealand Treasury in its series Treasury Working Paper Series with number 05/05.

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Length: 51 pages
Date of creation: Jun 2005
Date of revision:
Handle: RePEc:nzt:nztwps:05/05

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Keywords: New Zealand; Australia; Capital-labour ratios; relative factor prices;

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References

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  1. Johnson, R W M, 1972. "Efficiency Growth in N. Z. Agriculture: A Review," The Economic Record, The Economic Society of Australia, vol. 48(121), pages 76-91, March.
  2. Sebastián Claro, 2002. "A Cross-Country Estimation of the Elasticity of Substitution between Labor and Capital in Manufacturing Industries," Documentos de Trabajo 226, Instituto de Economia. Pontificia Universidad Católica de Chile..
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  8. Edward J. Balistreri & Christine A. McDaniel & Eina Vivian Wong, 2003. "An Estimation of U.S. Industry-Level Capital-Labor Substitution," Computational Economics 0303001, EconWPA.
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Citations

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Cited by:
  1. Razzak, W A, 2010. "A contribution towards New Zealand's tax reform," MPRA Paper 25680, University Library of Munich, Germany, revised Sep 2010.
  2. Claus, Iris, 2011. "Inside the black box: How important is the credit channel relative to the interest and exchange rate channels?," Economic Modelling, Elsevier, vol. 28(1-2), pages 1-12, January.
  3. Iris Claus, 2006. "Taxation And Finance Constrained Firms," CAMA Working Papers 2006-20, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  4. Stephenson, John & Yang, Qing, 2011. "Industry productivity and the Australia-New Zealand income gap," NZIER Working Paper 2011/3, New Zealand Institute of Economic Research.
  5. Richard Dion & Robert Fay, 2008. "Understanding Productivity: A Review of Recent Technical Research," Discussion Papers 08-3, Bank of Canada.
  6. Edda Claus & Iris Claus, 2007. "Transmitting Shocks To The Economy: The Contribution Of Interest And Exchange Rates And The Credit Channel," CAMA Working Papers 2007-03, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  7. Laabas, Belkacem & Weshah, Razzak, 2011. "Economic Growth and The Quality of Human Capital," MPRA Paper 28727, University Library of Munich, Germany.
  8. Claus, Iris, 2011. "The effects of asymmetric information between borrowers and lenders in an open economy," Journal of International Money and Finance, Elsevier, vol. 30(5), pages 796-816, September.
  9. Iris Claus & Kunhong Kim, 2006. "Credit Market Frictions In An Open Economy," CAMA Working Papers 2006-04, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  10. Razzak, Weshah, 2008. "On The dynamic of search, matching and productivity in New Zealand and Australia," MPRA Paper 8262, University Library of Munich, Germany.
  11. Aaron Drew, 2007. "New Zealand's productivity performance and prospects," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 70, March.
  12. Iris Claus & Brandon Sloan, 2008. "VARIABLE GSTl A TOOL FOR MONETARY POLICY IN NEW ZEALAND?," CAMA Working Papers 2008-30, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  13. Geoff Mason & Matthew Osborne, 2007. "Productivity, Capital-Intensity and Labour Quality at Sector Level in New Zealand and the UK," Treasury Working Paper Series 07/01, New Zealand Treasury.

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