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Productivity Statistics: 1988−2006 Revised 1 May 2007 – See attached Erratum
Embargoed until 10:45am  –  01 May 2007
Commentary

Unless otherwise stated, all references to average movements are annual geometric mean movements relating to the 'measured sector'. In 2003, the measured sector covered approximately 63 percent of the economy. It excludes the following industries: government administration and defence, health, education, property and business services, and personal and other community services. Refer to the Technical Notes of this release for a more detailed definition and explanation of the measured sector.

Background

Productivity is a measure of how efficiently inputs are being used within the economy to produce outputs. Productivity is commonly defined as a ratio of a volume measure of output to a volume measure of input. Growth in productivity means that a nation can produce more output from the same amount of input. Productivity growth is an important contributing factor to a nation’s long-term material standard of living.

Productivity measures can be either single factor – relating a measure of output to a single measure of input, or multifactor – relating a measure of output to a bundle of inputs. Labour and capital productivity are single (or partial) factor productivity measures; they show productivity growth in terms of that particular input. Hence, productivity changes shown in these indexes may be occurring due to a change in the composition of total inputs rather than a direct productivity increase from the relevant input. For example, if additional machinery (capital input) is used to assist in production, less labour input may be required to produce the same level of output. This will increase labour productivity, simply because the composition of the inputs has altered. On the other hand, multifactor productivity takes into account substitution between labour and capital inputs, and is therefore not directly affected by a change in the composition of total inputs. The growth accounting sections of this commentary provide a breakdown of the sources of growth in real gross domestic product (GDP) and labour productivity.

Statistics New Zealand’s official productivity statistics comprise series for labour productivity, capital productivity and multifactor productivity (MFP). The MFP series uses the labour and capital input indexes, which are combined and weighted appropriately to create a total inputs series. All input and output indexes measure growth in volumes and have a base year of 1996, with real GDP as the output measure. The development of these official statistics is consistent with Organisation for Co-operation and Development (OECD) guidelines.

The productivity measures are for the years ended March 1988 to 2006. This period reflects the current availability of relevant source data. Productivity series are of the most interpretative value when viewed in terms of business cycles rather than individual years. This is because factors such as capacity utilisation tend to vary over a business cycle. Statistics NZ intends to publish the productivity series back to 1978 and this longer time series will be more appropriate for the estimation of business cycles. In the absence of business cycles, the 18-year period has often been split into two distinct time spans – 1988 to 1993 and 1993 to 2006. There is widespread consensus that a break in the New Zealand economy occurred around 1993.

Revisions

This release contains revisions to previously published figures. These revisions result from: new and updated data used in the calculation of the input and output indexes; and the implementation of new methodologies. Refer to the Technical Notes of this release for more details.

Labour productivity

Graph, Measured Sector Labour and Output Indexes.

Labour productivity is measured as a ratio of output to labour input. Labour productivity in the measured sector increased 0.7 percent for the year ended March 2006. This compares with growth of 2.1 percent for 2005 and an annual average of 2.2 percent between 1993 and 2006. Low growth for the March 2006 year was driven by relatively weak output growth of 1.4 percent and sustained employment growth over the period.

A strong fall in the rate of labour productivity growth, as shown for the 2006 year, could be explained by several factors. One theory is that the utilisation of capital capacity falls as demand slows, which would lead to a fall in output growth. Another possible influence would be a change in the skill composition of the employed labour force, due to skill shortages resulting from a buoyant labour market. This was highlighted by a March-year record low unemployment rate (3.7 percent) and a record high labour force participation rate (68.1 percent) for 2006. Other potential factors include firms holding on to existing staff, despite a slowing of the economy, to minimise the cost of re-hiring staff when the economy picks up again.

Over the entire 1988 to 2006 period, average annual growth in labour productivity was 2.5 percent. This was derived from a 2.7 percent annual growth rate in output, and 0.2 percent annual growth in labour input. The relatively low growth in labour input between 1988 and 2006 should be viewed in the context of the labour market dynamics over the period.

From 1988 to 1993, the labour market was characterised by declining employment (and rising unemployment). This decline was particularly evident in the measured sector (refer to the Technical Notes for a detailed definition of the measured sector). In contrast, the non-measured sector experienced slight upward growth. Average annual growth in measured sector labour input fell 3.2 percent over this period, while output declined slightly, averaging growth of -0.2 percent annually over the period. This led to an average annual increase of 3.2 percent in labour productivity.

From 1993 onwards, the series shows growth in labour input, averaging 1.5 percent per year. However, over this time the measured sector proportion of the labour market declined. This is because employment growth has been proportionately greater in industries (predominately service industries) outside the measured sector.

Initially, growth in employment over the 1993 to 2006 period was dominated by part-time employment, which has a dampening effect on labour input when measured in hours. Average annual output growth was 3.8 percent in the measured sector, leading to average annual growth in labour productivity of 2.2 percent over the period.

Capital productivity

Graph, Measured Sector capital and Output Indexes.

Capital productivity is measured as a ratio of output to capital input. Capital productivity in the measured sector decreased 2.9 percent for the year ended March 2006. This productivity measure is low when compared with the 0.3 percent decline for 2005, and the annual average of 0.9 percent growth between 1993 and 2006. The decline in capital productivity for the March 2006 year was the result of strong growth of 4.4 percent in capital input, combined with output growth of only 1.4 percent.

This decline in the productivity of capital is likely to be due to a combination of factors. These may include a drop off in the utilisation of existing capital capacity – where the total amount of capital may have increased, but the level of capital actually in use may have decreased. Measurement of capital input in these productivity statistics assumes constant capacity utilisation. Additionally, the very strong growth in capital input from 2004 to 2006 may have had a lagged effect on output. This lag would be due to learning effects involved in the adoption of new capital.

Capital productivity in the measured sector increased 1.7 percent between 1988 and 2006. This increase reflects a 61.0 percent growth in output, compared with a 58.3 percent growth in capital input over the period. Average annual growth in capital productivity was 0.1 percent between 1988 and 2006.

From 1988 until 1993, annual capital input rose 2.0 percent on average while output fell 0.2 percent on average. This led to an average annual decrease of 2.1 percent in capital productivity. From 1993 until 2006, average annual growth in capital input was 2.8 percent while growth in output was 3.8 percent. This resulted in average annual growth in capital productivity of 0.9 percent over the period.

Multifactor productivity

Graph, Measued Sector Input, Output and Productivity Indexes.

Multifactor productivity is growth that cannot be attributed to capital or labour, such as technological change or improvements in knowledge, methods and processes. In the measured sector, MFP decreased 1.0 percent for the year ended March 2006. This decline contrasts with a 1.0 percent increase for 2005 and the annual average increase of 1.7 percent between 1993 and 2006. The 2006 fall was driven by 2.4 percent growth in total input, and output growth of only 1.4 percent for the year ended March 2006. The growth in total input was driven by the 4.4 percent rise in capital input and the 0.7 percent rise in labour input.

In the measured sector, MFP increased 31.2 percent between 1988 and 2006. This increase reflects a 61.0 percent growth in output, compared with only 22.7 percent growth in total input. The movement in total inputs is a weighted average of the 3.3 percent growth in labour input and the 58.3 percent growth in capital input over this period. Average annual growth in MFP was 1.5 percent between 1988 and 2006.

From 1988 until 1993 annual growth in total input fell 1.3 percent on average, driven by a large fall in labour input. Output fell 0.2 percent annually over the same period. This led to an average annual increase of 1.1 percent in MFP. From 1993 until 2006, average annual growth in total input was 2.1 percent, while average annual growth in output was 3.8 percent. This led to average annual growth in MFP of 1.7 percent over the period.

Growth accounting for real GDP

Growth accounting examines how much of the economy's growth in output can be explained by the growth of combined inputs. In particular, growth in output (real GDP) can arise from three different sources: an increase in labour input, an increase in capital input, or an increase in MFP. The graph below presents growth in output between 1988 and 2006 in these three components.

Graph, Contribution to Measured Sector Real GDP Growth.

In 2006, output growth was 1.4 percent. Capital and labour inputs contributed 2.0 percent and 0.4 percent, respectively, while MFP partly offset this, declining 1.0 percent.

Over the entire 1988 to 2006 period, output growth averaged 2.7 percent. Capital input contributed 1.1 percent to this rise and labour input contributed 0.1 percent. Growth in MFP was consistently the largest contributor, averaging 1.5 percent on an annual basis.

From 1988 to 1993, labour input declined strongly, contributing -2.0 percent annual growth to GDP. This negative contribution was large enough to offset positive contributions from both capital input (which contributed 0.8 percent on average to annual GDP) and improvement in MFP (which contributed 1.1 percent average annual growth). GDP growth was slightly negative, averaging -0.2 percent annually over this period.

From 1993 to 2006, GDP growth was relatively strong, averaging 3.8 percent on an annual basis. This reflected positive growth from all three contributors: labour input contributed 0.9 percent annually, capital input contributed 1.2 percent, and MFP increased 1.7 percent on an average annual basis. Within this 13-year timeframe, 1994 to 1997 and 2000 to 2005 were periods of solid growth, with all three contributors (labour input, capital input and MFP) having a positive impact on growth. However, in 1998 and 1999 the New Zealand economy experienced a downturn, largely due to the Asian economic crisis. This resulted in declining labour input in both these years, and negative MFP growth in 1999. As a result, output growth was negative in 1999.

Capital to labour ratio

Graph, Measured Sector Factor Inputs and Capital to Labour Ratio Indexes.

The capital to labour ratio simply measures capital inputs divided by labour inputs. An increase in the ratio is referred to as capital deepening, while a decrease is termed as capital shallowing. For the year ended March 2006, capital input increased 4.4 percent, while labour input increased 0.7 percent. This resulted in the capital to labour ratio rising 3.7 percent.

From 1988 to 2006, capital input increased 58.3 percent, compared with an increase of only 3.3 percent in labour input. This resulted in an increase of 53.3 percent in the capital to labour ratio over the 18 years. The annual average increase in the capital to labour ratio was 2.4 percent.

From 1988 to 1993, labour input growth fell an average of 3.2 percent on an annual basis. Average annual growth in capital input of 2.0 percent resulted in the capital to labour ratio increasing by an average of 5.4 percent annually. Over this period, there was steady growth in capital input, but the labour market was characterised by declining employment, resulting in a high level of capital deepening.

From 1993 to 2006, labour input increased at an average annual rate of 1.5 percent. Capital input increased at a higher average annual rate (2.8 percent), which resulted in the capital to labour ratio increasing by an average of 1.3 percent annually. Despite positive labour input growth, it was still outstripped by the capital input growth. Therefore, the economy experienced a more modest level of capital deepening from 1993 to 2006.

Growth accounting for labour productivity

As with growth in output, growth in labour productivity can be broken into components. In particular, a change in labour productivity can come from two possible sources: a change in the weighted capital to labour ratio (ie capital deepening or capital shallowing) and a change in MFP.

Graph, Contribution to Measured Sector Labour Productivity Growth.


Capital deepening was the largest driver of the 0.7 percent labour productivity growth for the year ended March 2006. Its contribution of 1.7 percent growth contrasts with the 1.0 percent decline in MFP.

Over the entire 1988 to 2006 period, the average annual contribution to labour productivity growth from capital deepening was 1.0 percent. The average contribution of MFP growth was 1.5 percent on an annual basis. Labour productivity growth averaged 2.5 percent annually.

From 1988 to 1993, capital deepening was the largest contributor to growth in labour productivity, with an average contribution of 2.0 percent annually. During this time, firms shed significant amounts of labour, and unemployment reached a historic high of 10.9 percent in the September 1991 quarter. An annual average of 1.1 percent was contributed by MFP to annual labour productivity growth of 3.2 percent.

However, from 1993 to 2006 MFP growth was the largest contributor to labour productivity growth, averaging 1.7 percent on an annual basis. The decline in pre-1993 labour input reversed, resulting in smaller increases in the capital to labour ratio. Therefore, the contribution of capital deepening was subdued – it contributed 0.6 percent to labour productivity growth on an annual basis over this period. Labour productivity rose by 2.2 percent on an average annual basis.

Future productivity developments

Statistics NZ is embarking on a multi-year programme to enhance the productivity measures published in this release. The main priorities of this work will be: to backdate the current series from 1988 to 1978; to develop industry-level measures of labour, capital and multifactor productivity; and expansion of the measured sector for industries which are currently excluded.

For technical information contact:
Brendan Mai or Joel Cook
Wellington 04 931 4600
Email: info@stats.govt.nz.

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