Wednesday, July 22, 2009

What is productivity anyway?

With the appointment of Don Brash to lead the government's new 2025 Taskforce into restoring parity with Australia, its worth asking: what is this "productivity" thing that the politicians are obsessing about? below is my attempt at a simple answer.

At its simplest, productivity is the ratio of economic output / inputs. While there are a lot of inputs, the common international comparison is GDP per hour worked. New Zealand does badly on this measure, with a productivity 25% lower than the OECD average, and 33% lower than Australia.

From the mathematics of the thing, it should be clear that there are two ways to increase productivity: you can increase output, or lower inputs. The first can be done by investing in a better widget-maker, or teaching people how to make them better, or coming up with new widgets which you can sell for more money - in other words, it needs investment by business in plant, training, or R&D. New Zealand's business "leaders" are fundamentally averse to that - investment requires money which they could instead take as profits - and so they have instead chosen to do it the other way: by lowering wages. That's what the Employment Contracts Act (and more recently, the 90 Days of Slavery bill) were all about: lowering wages and cutting workplace entitlements so they could get the same amount of work for less money, producing a boost in productivity. But this was counterproductive in the long term, leading to stalled capital investment and the opening up of the "productivity gap" with Australia (it was also politically unacceptable to most New Zealanders, leading eventually to the election of a Labour government, changes in employment law, and wage rises - which in turn decreased productivity - hence the current bout of whining).

Which path will the government take? Their statements in opposition are enlightening. As leader of the opposition, Don Brash pushed for weaker employment laws, fewer workplace entitlements, and a return to the "low wage, low skill, hire another warm body" economy he presided over as Reserve bank Governor in the 90's (John Key followed the same path). Meanwhile, Bill English was complaining that large wage rises in the health and education sectors (brought on by a decade of erosion under National) had decreased productivity. Which means we are likely to see more of the same: wage cuts by erosion, and a consequent lower incentive for real productivity gains. This will lead to strikes, particularly in the health and education sectors (teachers, doctors and nurses all know their power, and will use it to defend their position against this sort of madness) - but their business mates will book an easy profit by doing so, and that is all National cares about.