Tuesday, 24 September 2013

Running on the spot

Some ugly truth from in a recent Productivity Commission report(pdf). The chart shows annual growth rates in labour productivity by major sectors in NZ.
The report also notes that relative to an OECD average kiwis are working longer hours (15% longer) to produce less valuable outputs (20% less valuable). Something is seriously wrong here.

There are other nuggets in the report giving some clues as to what might be going on. For example, it seems that when the reforms of the late 80s and 90s forced workers to change industries, those shifts reduced labour productivity. Also, deep in the appendix is an interesting table that I've graphed below.
That bold line is at 45degrees, so sectors below the line are dragging overall labour productivity down. The vertical dotted line divides the sample into sectors with small and large shares of total paid employment. Note that none of the smaller sectors are below the 45degree line, and none of the larger sectors are above it.

The worst performer is retail, closely followed by construction and the non-mining primary sector. These are all big employers, accounting for 1/3 of paid hours between them. Accommodation & food is pretty hopeless also.

With these sectors in the frame, my conjectures are as follows.

Retail and accommodation/food seem very competitive with low entry barriers. I'd guess that lots of the value-added is probably being captured in property rents. These are also public-facing and cash-oriented, so declared revenue could be eroded by tax "management" as I suggested earlier, which would make things look worse than they are. What to do? One approach would be to find a whole lot more demand in a hurry (immigration, tourism etc) so we can put more volume through what must be under-used facilities. Another would be to try to change the perception of potential entrants - if these sectors are over-supplied perhaps its because they look like the kind of thing anyone can do, which leads lots of people to have a crack, but they can't all be winners because the market is too small.

Construction might not seem so competitive to anyone who has tried to get quotes from builders. But it certainly has low entry barriers, and in the past it has been flooded with new workers as trade builds up. So my working assumption is that the labour component of construction is pretty competitive. However there seem to be some parts of the construction value chain where significant rents are being scooped off, and that will contribute to low productivity by increasing input costs. That seems like the obvious area for policy focus.

What about agriculture? This needs a lot more work, but my hunch is that there has been a fair bit of cost inflation (land prices most obviously) and that farmers have lost some of their food-growing focus, particularly in dairying. Symptoms include huge growth in the volumes of bought-in feed and urea as fertiliser. A quick comparison of the national dairy budgets for the 2000 and 2012 seasons suggests that feed costs increased by a multiple of 2.4 over this period, on a per kg of milksolids basis. More attention to what is below ground level would help I reckon.

1 comment:

  1. "What about agriculture?"

    The productivity stats are averages with regards to real GDP. Relative return in agriculture have gone through the roof, making the use of more "marginal" inputs (including labour) more attractive.

    The same export price story exists in Aussie and Canada as well, so I'd say the agriculture one is a little less of a puzzle ;)