Productivity Puzzles

Why is Output Per Worker Growing So Slowly?

Listener:12 September, 1998.

Keywords: Growth & Innovation; Labour Studies;

A scientist puzzles most when a prediction fails. The generally poor performance of the New Zealand economy since 1985 (inflation excepted), was expected given the overvalued exchange rate as a part of the disinflation strategy. However the poor productivity performance was a surprise. By a careful selection of period or industry, or relying on anecdotes, it is possible to claim the growth of output per worker has been high. But a comprehensive review shows that productivity growth appears to have slowed down since the reforms, despite the pro-reformers promises that it would accelerate. Even those who might have expected the reforms to fail must be perplexed.

So it was with hesitation that I accepted an invitation to present the New Zealand evidence to an Australian Industries Commission conference in Canberra in February. The Australians have maintained a keen economic debate in which all views are represented, unlike here where it is de rigueur to exclude views that do not conform to official policy. Thus I knew my contribution would be in the middle of the Australian economics spectrum. Even so, I expected them to be doubtful of the evidence, despite my reworking and reworking it, trying to reconcile the promise and the facts. But most at the seminar seemed relaxed about our poor productivity performance. They were conversant with the overall poor performance of the New Zealand economy, for we have done much worse than the Australian economy since the mid 1980s. Perhaps I had been mislead by the Australian business journalists, who often are as off with the fairies about the effects of economics reforms, as their New Zealand compatriots. But Australian economists are considerably more sober, no doubt because of the robustness of their debate.

The conference seems to have arisen from growing doubts that microeconomic reforms do not appear to have generated the predicted productivity improvements. For instance, as in New Zealand, there appears to be no serious study which supports the notion that privatisation increases productivity. (There is evidence that corporatisation did.) Economic liberalisation of markets, commercialisation, and tariff reductions do not appear to have generated the promised gains. The contributor on the labour market, a woman of impeccably right wing credentials (she has worked for the Business Roundtable), was reduced to arguing that the Australian reforms had not produced productivity gains, and there would have to be further changes to obtain them. (Her argument is not supported by the New Zealand evidence. The Employment Contracts Act is associated with a slowdown in longrun labour market productivity growth.)

Perhaps because it was outside the conference remit (or perhaps Australians do not take the promises of significant gains seriously), there was no consideration of the productivity effects of reforms to the government sector – say in health and education. The New Zealand experience does not provide evidence of the gains either.

The Australian evidence is not as dead as ours. An interesting paper by Steve Dowrick of ANU suggested that Australian productivity growth accelerated in recent years. But having seen a similar boomlet for a couple of years in New Zealand in the early 1990s, it may be they are just seeing the effects of a cyclical upswing.

The right wing economists only quibbled with the evidence in my paper. The main theme of one commentator, who has worked as a consultant in New Zealand, was that there would be benefits from the New Zealand micro-economic reforms at some time in the future. This has been a consistent theme of the pro-reformers for the last fifteen years: their promised outcomes have not occurred, but they will eventually. I reminded the audience of historian G.M. Trevelyn’s 1945 assessment of the events of 1789: “It is still too early to form a final judgement on the French Revolution.”