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Capital Shallowness: A Problem for New Zealand?

  • Julia Hall
  • Grant Scobie

    ()

    (The Treasury)

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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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
Contact details of provider: Postal: New Zealand Treasury, PO Box 3724, Wellington, New Zealand
Phone: +64-4-472 2733
Fax: +64-4-473 0982
Web page: http://www.treasury.govt.nz

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  1. Erwin Diewert & Denis Lawrence, 1999. "Measuring New Zealand’s Productivity," Treasury Working Paper Series 99/05, New Zealand Treasury.
  2. Dale W. Jorgenson & Barbara M. Fraumeni, 1992. "The Output of the Education Sector," NBER Chapters, in: Output Measurement in the Service Sectors, pages 303-341 National Bureau of Economic Research, Inc.
  3. Douglas Gollin, 2002. "Getting Income Shares Right," Journal of Political Economy, University of Chicago Press, vol. 110(2), pages 458-474, April.
  4. Edward J. Balistreri & Christine A. McDaniel & Eina Vivian Wong, 2003. "An Estimation of U.S. Industry-Level Capital-Labor Substitution," Computational Economics 0303001, EconWPA.
  5. Sebastián Claro, 2003. "A Cross-Country Estimation of the Elasticity of Substitution between Labor and Capital in Manufacturing Industries," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 40(120), pages 239-257.
  6. 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.
  7. Someshwar Rao & Jianmin Tang & Weimin Wang, 2003. "Canada's Recent Productivity Record and Capital Accumulation," International Productivity Monitor, Centre for the Study of Living Standards, vol. 7, pages 24-38, Fall.
  8. Jorgenson, Dale W & Fraumeni, Barbara M, 1992. " Investment in Education and U.S. Economic Growth," Scandinavian Journal of Economics, Wiley Blackwell, vol. 94(0), pages S51-70, Supplemen.
  9. Trinh Le & John Gibson & Les Oxley, 2006. "A Forward-Looking Measure Of The Stock Of Human Capital In New Zealand," Manchester School, University of Manchester, vol. 74(5), pages 593-609, 09.
  10. Kam Leong Szeto, 2001. "An Econometric Analysis of a Production Function for New Zealand," Treasury Working Paper Series 01/31, New Zealand Treasury.
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