The massive importance of productivity
Bryce Wilkinson writes:
Imagine two farmers, each with a plot of land. One farmer finds ways to make his land just 1% more productive each year – a bit better irrigation, a new crop rotation strategy, or a slight improvement in fertiliser use. The other farmer, content with his current methods, sees no need for change.
Fast forward 20 years, and the difference between the two farms is dramatic. The innovative farmer’s land is now 22% more productive, while the passive farmer’s plot has stagnated. Which farm would an heir prefer to inherit?
This simple example illustrates the power of compound growth, a concept famously marvelled at by Albert Einstein, who reportedly called it the “eighth wonder of the world.”
Just as small, consistent improvements can lead to dramatic long-term gains in farming, the same principle applies to a nation’s productivity.
The only sustainable way to lift our standard of living is to lift our productivity.
Unfortunately, New Zealand’s productivity figures are troubling. Statistics New Zealand’s latest estimates, released this week, show negative growth for the year ended March 2023 across all three measures – labour, capital, and multi-factor productivity.
Even more worrying is the long-term trend: decadal labour productivity growth has steadily declined from 1.9% p.a. in 2006, to a paltry 0.6% to 2023.
Negative productivity is a disaster.
But let’s look at the average by Government in power.
So from March 1996 to March 2000 we had spectacular labour productivity and muktifactor productivity and modest capital productivity.
From March 2000 to March 2009, reasonable labour productivity, negative capital productivity and near zero multi factor productivity.
March 2009 to March 2018 also saw reasonable labour productivity, modest capital producitivyt and reasonable multi factor productivity.
March 2018 to March 2023 saw near zero labour productivity, negative capital productivity and negative multifactor productivity. Basically we went backwards with productivity.
To put these numbers into perspective, let us consider their impact on the average New Zealand household. If labour productivity continues to grow at the current sluggish rate of 0.5% per year, the average household income from salaries and wages will only reach $92,000 in 2023 dollars by 2043.
However, if productivity growth is a robust 2% annually, that figure jumps to $124,000 – markedly helping future generations to afford a higher standard of living, a cleaner environment, and more leisure time.
The difference to our standard of living is immense.
So, what can be done to turn the tide on New Zealand’s dismal productivity trend?
The answer lies in a concerted and sustained effort from successive governments, with businesses, and individuals able and willing to respond. Attracting overseas investment, reducing red tape to encourage innovation, and improving educational outcomes are all crucial components of the recipe.
Also important is helping those without jobs to find work and shifting people out of low-productivity roles
We need far far more stories on productivity and fewer on job losses.
As this shows, NZ is doing very badly compared to other countries post-Covid.