Most of the income gap between NZ and Australia is due to low labour productivity in NZ's services sector

Reposted from NZ Institute of Economic Research (Inc), NZIER (Yang & Stephenson, 2011). 

“Differences in productivity explain much of the growing income gap between Australia and New Zealand. Good policy responses rely on understanding the sources of these differences.

“Seventy percent of the aggregate gap in productivity between the two countries is due to under-performance of New Zealand’s industries rather than a difference in the industrial structure of the two countries.

“Despite often voiced concerns to the contrary, capital intensity is not the main thing we should be concerned with when worrying about the growing income gap with Australia, as that primarily reflects differences in economic structure. New Zealand’s principal problem is multifactor productivity – the quality of management, organisational innovation, the production process, and the quality of labour and capital. Simply investing in more capital is of secondary importance.

“There are sectors in New Zealand, sadly too few, which outperform Australia’s – in agriculture and energy and water supply. New Zealand has even been performing better in the one sector which many are quick to label the secret of Australia’s success – mining. Most of the income gap can be attributed to low labour productivity in the services sector. The sheer size of this sector means this is a problem that needs a serious second look.

“Our findings support the idea of studying and tackling the root causes of productivity differences at the sectoral level. The significant differences in multifactor productivity also indicate the need for more focus on the quality of labour, capital, and management, and regulatory environment.”

A note from DOMM: Need help improving your organisation’s productivity?

The Unitec Department of Management and Marketing offers courses in operations management, quality management, strategic thinking, innovation,  new venture creation, and entrepreneurship.

Figure 1: Decomposing the New Zealand-Australia income gap (Source NZIER, OECD STAN Database)

Per cent contribution to next tier up, 2001-2006, at 2006 prices. Rounded to nearest decile.

Related articles

• Standard & Poor’s, Fitch downgrade NZ on growing debt (huffingtonpost.com)
• Video: Inflation wars – Australia, New Zealand, Singapore (tradingfloor.com)
• Lessons for NZ (homepaddock.wordpress.com)