Statistics can be funny things. If, instead of looking after ourselves, I mow my neighbour’s lawn and he cooks my dinner - both for a fee - we would increase the output of the market economy.

According to the national GDP figures, we would all be better off – in my case especially so given my lapsed cooking skills. What’s more, labour participation in the economy would have risen and, again reflective of the modest cooking skills in discussion here, average labour productivity across the economy would go down.

In other words, we would have added low value-added jobs to the market economy, something which has actually happened in New Zealand in the last 13 years. New Zealand has been very good at adding jobs to the economy since the post-reform resurgence that dates back to late 1991.

The jobs machine
This decline in unemployment – some 105,000 people in 13 years – is impressive. We have gone from an unemployment rate of 10.7% in December 1991 to an unemployment rate earlier this year of of 3.9%, the second lowest in the OECD. In spite of my scepticism expressed earlier about statistics, this is a very real gain for the economy and for the people concerned.

Even more impressive is the sheer increase in jobs over those 13 years - a total of 555,000 more jobs that accommodated the aforementioned unemployed and the far-larger increase in the population.

And if you had any lingering doubts about whether the job machine was working, recent OECD statistics ranked New Zealand in 2002 as second only to the Czech Republic among OECD members in terms of hours worked per person - an average of 850 hours per year per man, woman and child. We are a people at work.

This jobs growth has been an integral part of the high GDP growth rate enjoyed by the New Zealand economy over the last 13 years. Economic output has increased 3.5% per annum on average over this period, well in excess of the 2.5% OECD average and only a notch below the 3.7% Australian average. Only Ireland, with growth around 6% to 7% p.a., grew significantly faster within the OECD.

But put these figures in terms of GDP per capita, the common measure of relative wellbeing (albeit only a partial measure at best), and we are crawling up the OECD ranks. We have improved, and as a sign of that improvement, the government reported earlier this year that we recently passed Spain to now rank 20th among the OECD members (immediately behind Italy and some 10 places behind Australia).

Running out of people
Here’s the catch. The improvement was largely due to jobs growth. And we are now running out of spare persons to put into work.

In the OECD survey of New Zealand released last year, our increase in output per hour worked (+0.9% p.a.) was shown to have been only half that of the OECD aver- age between the March years of 1991/92 and 2001/02. Refer to Figure 1 below.

June 2005

There was a hint that productivity growth was improving – we were running near the OECD average between 1999 and 2002 – but even more recent data shows that we still have not shaken free of our labour-intensive growth path. In 2004, in spite of an already tight labour market and a high output growth rate, output per hour reverted to the previous low rate of growth.

The net effect is a wealthier economy, both last year and in the previous 12 years. But it is not a recipe that we can repeat.

The productivity challenge
We may be able to increase the hours worked in the economy by around 1% p.a. in the next five to 10 years. After all we will maintain fast immigration and hence a strong population growth rate. We may even be able to lift this labour growth rate to 1.5% p.a. if we can entice and/or assist some of the 80,000 unemployed into work, or the 90,000 claiming to be underemployed, or the 1 million people aged 15 and older who don’t consider themselves to be part of the workforce (e.g. students, homemakers, retirees, those between jobs, those unwell or those simply disillusioned about getting a job). But we will struggle to do better.

This leaves having to lift the historical 0.9% p.a. labour productivity growth rate to around 1.5% to 2.0% p.a. to achieve an output growth rate of 3% in the next few years. This is our collective challenge - and that’s only to achieve a moderate growth rate.

There is much debate as to why New Zealand is achieving below-average productivity. Some of it may be the perverse result of our labour market success. One has to ask how many taxis, cafes and dairies do we need. It is great for consumer choice but it is hardly high-value; nor an efficient use of local labour. Invariably some of these people will be lured away by higher wages towards higher value-added jobs. Of a similar ilk, we will surely see more amalgamation of existing businesses – by merger, by take-over or simply by putting the other out of business – as greater economies of scale are sought.

Interestingly, Australia has relatively more small businesses than New Zealand. And yet Australian productivity growth has matched the OECD average. So while more economies of scale will be part of the solution, it is not necessarily to blame for our poor productivity record. After all, Australia is also remote; Australia is not a big economy; and Australia has a larger proportion of low-qualified people. These statistics suggest the core problem lies elsewhere.

Where Australia has outperformed New Zealand – and by a large margin – is investment. We are in the bottom OECD quartile for business investment; Australia is in the top quartile.

The under-investment is evident in local infrastructure such as roading, electricity and broadband (some of which is government investment as opposed to business investment). It is also happening across the wider business sector.

Weak investment growth causes two problems: there is the obvious lack of capital; but there is also the lost opportunity of the new technology that is typically embodied in new capital equipment. Of particular concern, New Zealand investment in ICT has been low. At around 21⁄2% of GDP in 2000, including just under 1% in software, our ICT investment rate was well below Australia (almost 4% including 11⁄2% software) and the US (5%). Refer to Figue 2 below.

Recent data suggest that we are increasing investment. The national accounts show investment growth last year of 16%. The NZIER survey of medium-to-large businesses shows business are keener to invest now than they were in the late 1990s.

But there are also some hints that things could be better. The latest quarterly investment figure available (the December quarter) shows a small quarterly decline. The NZIER survey also shows a slight drop in confidence.

More telling, the investment intentions expressed are far below those of the early-to-mid 1990s, and that was when capacity constraints were even less and unemployment much greater.

The opportunity
There appears to be a window of opportunity for above-average investment today. Sure, the local economic growth rate will probably slow. But this is more to do with supply constraints than a lack of demand. There is also a large cyclical element to any slowdown due. The medium- and long-term outlook for the New Zealand economy is good.

That makes the opportunity created now by the high New Zealand dollar all the more appealing. The kiwi dollar is also cyclical. It is currently well above its long-term average and, while it may not depreciate in the next few weeks or few months, an exchange rate at this level is unsustainable for our export sector and a return to average is very likely over the next two to three years. That means – and here’s the sales pitch – that foreign capital equipment is well priced at present.

Of course, it is all very well for an economist to claim that it is in the national interest to invest more. It also has to add up for a business to be worthwhile. That is an individual matter. However it would be wise to factor into any modelling relatively good economic demand (in general) over the next 10 years, much higher labour costs than experienced in the past and eventually a lower New Zealand dollar. This set of circumstances is likely to be favourable to investment.

Well, at least that's the story I’m giving to my neighbour as I persuade him he needs a robo-mower.

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