New Zealand's Productivity Performance: Taking a Broader View

Since the early-2000s, New Zealand’s per capita real income has grown faster than its per capita real Gross Domestic Product (GDP) – reflecting a rising terms of trade. This increasing and persistent difference has important implications for the interpretation of New Zealand’s economic performance: Using historical GDP is likely to understate the income and wellbeing benefits of the changes in economic structure since the early 1990s. The income gain arising from a higher terms of trade is greater when policy settings enable resources to move into higher value production. The income gain provides more choices, both for consumption and investment. Nonetheless, labour productivity growth has been the main source of growth in both per capita income and output measures. New Zealand’s measurement of average annual hours worked tends to produce systemically higher results than other OECD countries, many of which utilise a relatively conservative method. As a result, comparing New Zealand internationally can result in overstated differences in hours worked, and understate New Zealand’s labour productivity compared to other countries. But neither this effect nor the terms of trade effect restore New Zealand’s past productivity or income relativities against high-income OECD comparators. New Zealand is increasingly a service economy. Using trade-in-value added, as opposed to gross exports, indicates the increasing role of services embodied in the exports of primary and manufacturing industries. This finding reinforces the importance of policies that raise the productivity of services – both for the direct effect on the sector but also the indirect effects on export competitiveness. This note indicates areas of possible further research and gaps in the evidence base, including the drivers of changes in the terms of trade and the role of intangible capital in the New Zealand economy. The Treasury is planning further analysis examining the links between productivity, income, and the wellbeing domains of the Living Standards Framework (LSF).