New Zealand's productivity puzzle

Dr Bryce Wilkinson
Insights Newsletter
19 April, 2024

Imagine two farmers, each with a plot of land. One farmer finds ways to make his land just 1% more productive each year - a bit better irrigation, a new crop rotation strategy, or a slight improvement in fertiliser use. The other farmer, content with his current methods, sees no need for change. 
Fast forward 20 years, and the difference between the two farms is dramatic. The innovative farmer's land is now 22% more productive, while the passive farmer's plot has stagnated. Which farm would an heir prefer to inherit?
This simple example illustrates the power of compound growth, a concept famously marvelled at by Albert Einstein, who reportedly called it the "eighth wonder of the world." 
Just as small, consistent improvements can lead to dramatic long-term gains in farming, the same principle applies to a nation's productivity.
Unfortunately, New Zealand's productivity figures are troubling. Statistics New Zealand's latest estimates, released this week, show negative growth for the year ended March 2023 across all three measures - labour, capital, and multi-factor productivity. 
Even more worrying is the long-term trend: decadal labour productivity growth has steadily declined from 1.9% p.a. in 2006, to a paltry 0.6% to 2023.
To put these numbers into perspective, let us consider their impact on the average New Zealand household. If labour productivity continues to grow at the current sluggish rate of 0.5% per year, the average household income from salaries and wages will only reach $92,000 in 2023 dollars by 2043. 
However, if productivity growth is a robust 2% annually, that figure jumps to $124,000 – markedly helping future generations to afford a higher standard of living, a cleaner environment, and more leisure time.
So, what can be done to turn the tide on New Zealand's dismal productivity trend?
The answer lies in a concerted and sustained effort from successive governments, with businesses, and individuals able and willing to respond. Attracting overseas investment, reducing red tape to encourage innovation, and improving educational outcomes are all crucial components of the recipe. 
Also important is helping those without jobs to find work and shifting people out of low-productivity roles, most immediately in the public sector.
The choices governments make today and tomorrow will have profound implications for the generations to come. By focusing on productivity growth, successive governments can unlock the key to a brighter future for all New Zealanders. 
Just as the innovative farmer's land flourished through consistent improvements, so too can New Zealanders thrive by persistent improvements that harness the power of compound growth. The more the government focuses on productivity growth now the better the prospects for our children and grandchildren, who will inherit the New Zealand that current generations build.

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