The Productivity Commission’s stinging slap to the face of working New Zealanders reveals we spend more time at the grindstone but achieve less. By the numbers, we work about 15% longer than the OECD average but produce 20% less when measured on an output per hour basis.

The report focuses exclusively on the labour side of the productivity formula, saying the measure has been sliding versus the developed world average for years. Indeed, the commission’s report notes that in Australia, the economy most comparable to New Zealand’s, labour productivity has outstripped New Zealand for decades.

Statistics New Zealand figures show that from 1996 to 2012, labour productivity has improved by 2.1% in the “lucky country” while on this side of the Tasman the measure rose just 1.4% – not much in a year but more significant on a compound basis.

Even on a longer basis, New Zealand has been lagging Australia as far back as 1978. But some important things must be noted about the productivity equation.

First, the numbers are misleading because they assume a straight-line comparison – they aren’t. The labour index shows that in prereform decades to 1986, labour productivity plodded along but improved as markets were freed up. It then resumed its amble from 2000 as those reforms were walked back.

That’s supported by the multi-factor productivity Index data over the same period. If anything, this measure – which includes technology and capital – shows a more aggressive improvement over the reform years.

Other factors that affect labour productivity, such as skills, aren’t just levers on a machine that we can pull and expect more productive working units to come out the other end. Recent reports claiming New Zealand has a shortage of graduates in every tertiary field, with the exception of communications, bear that out.

Then there’s capital. Between 1978 and 2012, capital inputs rose 3.1% in New Zealand but in Australia by 4.5%. On a tighter timeframe – 1996-2012 – that gap widens, with Australian capital inputs increasing 5.4% against New Zealand’s steady 3.1%.

An example of this under-capitalisation can be seen in the forestry sector, the third biggest export earner after dairy and meat. Timber mills have closed because they can’t compete with the Chinese cost of labour. So, instead, raw logs are shipped to Asia.

Other first world countries, including Canada, Australia, the US and of course the Scandinavians, are all able to compete against China because they’ve invested in their mills to make them more productive.

Meanwhile, many of New Zealand’s timber mills run on a 30-year-old kit bought secondhand from Australia. These older plants are heavily reliant on physical labour to make up for the lack of automation.

While this is hardly representative of the economy in general, it’s almost certain readers will be able to easily name a company that’s sweating the return on investment from outdated machinery.

Does this mean industries are reluctant to invest? The figures suggest that’s not the case but there are issues around the efficient application of capital both here and in Australia. Between 1978 and 2012, capital was applied more productively here than the Australians (-0.8% versus -1.2%). This also holds up over the tighter timeframe of 1996-2012 (-0.6% versus -1.7).

One part of the puzzle is explained by the fact that capital is expensive in New Zealand. Capital markets are shallow due to our low saving rate, small equity markets, poor financial literacy, exchange rate volatility and high levels of tax and external indebtedness.

New Zealand is not attractive to foreign capital, either. The Ministry of Business, Innovation and Employment estimates that enterprises have to offer at least 100 basis points over what foreign investors can get in the US to lure capital to New Zealand.

Some progress has been made in these areas, specifically with more listings on the NZX and the growth of the KiwiSaver funds under management but a lot of work remains to be done.

It is premature to lambaste the Productivity Commission for having too narrow a focus on just the labour side of the equation – especially as the report didn’t make any recommendations – but it’s obvious that all the inputs that go into productivity must be examined if real gains are to be made.