New Zealand’s poor productivity record won’t help inflation

Productivity refers to the rate of output per unit of input. For an economy to increase output it can either increase its factors of production or combine them in a way that is more efficient – greater productivity. The latter is the key to boosting per-capita incomes and overall living standards.

Compared to the OECD New Zealand has been a poor performer with labour productivity averaging around 1% per annum since the early 1990’s but the small size of the economy and its isolation remain significant barriers. More inputs of factors of production have been required to generate the same amount of output which suggest that we are working harder but not smarter. As in many other OECD economies, labour productivity growth in New Zealand declined after the global financial crisis, to about a half of the pre-crisis rate – see graphic from OECD.

New Zealand’s productivity has struggled to keep apace with other OECD countries and is around 20% below the average. Its real GDP per hours worked is 40% below the US and 30% below Australia. The OECD have indicated that there are reasons for this poor productivity record namely a lack of international connection, a mismatch of skills in the labour force and low rate of capital investment / R&D.

Productivity is a way of reducing inflation by increasing output per unit of input. But if New Zealand is unable to improve its productivity performance inflation will only slowly subside. This means a contractionary monetary policy (higher interest rates) from the RBNZ will remain in place for longer.

Source: OECD Economic Surveys New Zealand – January 2022

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