 Understanding the effect of changing industry structure on New Zealand's labour productivity slowdownHilary Devine and
Finn Smith
Treasury Analytical Notes Series from New Zealand Treasury Abstract: New Zealand has experienced a significant and persistent slowdown in productivity growth over the last decade. While many advanced economies have experienced this slowdown, New Zealand has been more adversely affected due to consistently lower than OECD-average labour productivity. Treasury (2024) looked at the drivers of New Zealand’s productivity slowdown, but did not examine the industry sources of our slowing productivity growth. This paper fills a gap by quantifying the productivity slowdown through shift-share decomposition to examine the sources by industry. The analysis captures the shift of firm productivity within each industry, the shift of labour between low and high labour productivity industries, and the shift of labour between low and high labour productivity growth industries. This type of analysis has not been published in New Zealand for over a decade (see Meehan, 2014). The updated analysis includes a more up-to-date data set which captures the effect of two significant shocks – the Global Financial Crisis (GFC) and COVID-19 pandemic. We find that New Zealand’s labour productivity slowdown is broad based across industries. Overall our results are similar to Meehan (2014), showing that New Zealand’s slowing labour productivity growth is primarily due to low within-industry labour productivity growth, where the distribution of firm productivity plays a significant role in explaining within-industry effects (Syverson, 2011). The across industry effect is small and has mixed effects, but shows on average stronger reallocation towards low labour productivity industries over the period, resulting in a drag on overall labour productivity growth. We also look at the reallocation trends across the OECD to see if they reflect similar dynamics, particularly in light of large economic shocks (eg, GFC and COVID-19). Other OECD countries have seen a gradual increase in aggregate labour productivity growth since the GFC in contrast to New Zealand’s slowing growth over this period. Between 2012 and 2021, 18 of the 27 sample countries exhibit an increasing trend, including 6 of the 8 Small Advanced Economies (SAE’s). Much like New Zealand, the within-industry effect dominates for the OECD. However, the OECD average also has positive across-industry effects, which appear to be consistent among individual sample countries. Some caution is needed when interpreting these results due to data and comparability issues. Differences in structural reforms, their timing, and the extent of industry changes across countries complicate cross-economy comparisons. But the results suggests that overall, OECD countries are on average seeing a movement of labour into relatively higher labour productivity industries in contrast to New Zealand. Both New Zealand and the OECD average show evidence of the shift towards a services-based economy, with labour moving out of the Agriculture and Manufacturing industries, and into industries such as Professional, Scientific and Technical Services, Information Media and Telecommunications, and Healthcare. However there is considerable heterogeneity of labour productivity across industries in the service sector. Firm-level analysis would provide richer insights into the within-industry component, as it captures micro-level reallocations including firm entry and exit, labour reallocation between firms, and productivity changes. This approach would reflect reallocation dynamics at the firm level, offering a more granular perspective. Similar analysis in other countries has shown this heterogeneity at the firm level, particularly between frontier and laggard firms (ECB, 2021). Due to data availability, this paper is constrained to industry level insights. Better understanding of these industry and firm dynamics could enhance our knowledge of productivity drivers, particularly how reallocation within industries might align with firms that engage in exporting, innovation, and increased capital investment. The interplay between tradeable and non-tradeable sectors and our ongoing transition to services also deserves attention, as the propensity to export may differ for New Zealand compared with other OECD countries. These are all areas for further work. JEL-codes: D22 L16 O4 O56 O57 (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:nzt:nztans:an25/11 Access Statistics for this paper More papers in Treasury Analytical Notes Series from New Zealand Treasury New Zealand Treasury, PO Box 3724, Wellington 6140, New Zealand. Contact information at EDIRC. |
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