Appendix B: Summary of potential high-value “inquiry topic” ideas identified through this process

As part of the original work to identify potential topic areas for an inquiry to be progressed by the Productivity Commission, a small number of topics were assessed as being potentially high value for work.

Note that these topic areas do not reflect the full range of ideas raised by stakeholders, or where there would be value to examine a productivity challenge. They instead reflect the top-performing topics based on assessment against four key criteria: 

• magnitude of potential impact of the topic on productivity and wellbeing
• extent of potential distributional impacts of the topic across the population
• degree of alignment of the topic with the role, mandate and capabilities of the Productivity Commission
• whether timing is right to pursue the topic, given the broader operating context.

We note that these criteria will have filtered out some potential topic areas that there could be value in addressing, but where broader constraints or the role/capabilities of the Commission would have presented barriers to taking a topic forward. However, this set of topics may still provide some value for agencies and government considering what opportunities there may be to examine, and potentially address some of Aotearoa New Zealand’s current and emerging productivity challenges. All these topics are valuable and are not ranked in any specific order. 

The potential topics set out in this Appendix are:

1. Insurance retreat

2. Capital deepening

3. Innovation diffusion

4. Land use

5. Energy system transformation

6. Readiness of regional economies and labour markets for transition

7. The care economy

8. Skilled employees and lifelong learning.

1. Insurance retreat

Insurance underpins the operation of Aotearoa New Zealand’s economy and society. It provides certainty for individuals, businesses and investors to operate and helps them recover from unexpected events. Insurance also plays a key role in disaster recovery for individuals, communities and the economy. 

It is expected that climate change will increase the risk to existing assets due to sea-level rise and more extreme weather. Paired with Aotearoa New Zealand’s pre-existing natural disaster risks – such as high-magnitude earthquakes – this is likely to result in “insurance retreat”^[10] over time. Early signals of this have already been observed for some coastal communities and in the wake of recent natural disasters.

Insurance retreat will significantly impact productivity across the economy, and Aotearoa New Zealand’s overall experience of wellbeing. For example, productivity could decrease due to a reduction in investment, a fall in business confidence, or because of economic scarring caused by delays in economic recovery and disruption to people’s ability to work. There could also be pressure for the state to provide support to uninsured individuals and businesses, with this fiscal risk potentially incurring opportunity cost as a result of not being able to fund other productivity and wellbeing enhancements. 

Te Tiriti impacts or differential impacts on Māori are likely, due to factors such as the connection to land and water, pricing of cultural assets, and different attitudes to insurance.

There is increased interest in addressing this topic area, and a base of existing evidence and connected work, but for now there has been limited progress or consensus on what actions to take. 

Investigating this issue could examine key issues such as: 

• how individuals and businesses respond to risk, price signals, and incentives
• moral hazard
• the intersection with risk-reduction activities
• the appropriate role of central and local government
• understanding the market structure and commercial considerations of the sector.

2. Capital deepening

Capital intensity is a key driver for increasing productivity. Aotearoa New Zealand’s persistently low levels of productivity growth may be partly due to the low levels of capital relative to workers, compared with other OECD countries. New Zealanders work more hours to account for the lower level of capital input. This topic provides an opportunity to address one of the key challenges for Aotearoa New Zealand’s productivity growth.

The persistent problem of capital shallowness for Aotearoa New Zealand, and the research and commentary around this, generally refers to the low levels of physical assets or tangible capital (such as factories, machinery and tools), suggesting that the core focus of work in this area should be on investment in physical assets. However, there could also be value in considering other forms of capital further, particularly if they are likely to affect the deepening of physical capital – for example, intangible capital and natural capital.

Some starting points for consideration of this topic could be to investigate:

• The cost of capital: the cost of capital in Aotearoa New Zealand is high and could affect the amount of investment in capital.
• Access to capital: there may be barriers to accessing finance, which can reduce the amount of investment by firms. Aotearoa New Zealand’s financial markets are dominated by mortgage bank lending, with small and potentially underdeveloped equity and listed markets.
• Demand for capital: firms may choose not to invest due to factors such as limited competition and incentives to expand, which are often used overseas by small and medium-sized firms as a defensive strategy.
• Firm-level analysis: the dominance of small and medium-sized firms in Aotearoa New Zealand may present specific challenges to capital investment.

Considerable research literature has been written on this topic both in Aotearoa New Zealand and internationally, as the link between capital intensity and productivity is well-established. There may be potential gaps that can be examined further, such as the role that the housing market plays in relation to the issue. However, the significant opportunity posed by this topic is to bring together the research that already exists, to identify how the topic fits together, what it means, and what could be done in the Aotearoa New Zealand context. 

3. Innovation diffusion

Innovation is fundamental to productivity growth and improving living standards. It is the process of generating new economic value by creating, adopting and adapting knowledge into new or improved products and services, operational processes, organisational and managerial processes, and approaches to marketing. The adoption of innovations is a key driver for increasing productivity within businesses and organisations.

Productivity growth is influenced by how quickly innovation diffuses across the economy. Much of Aotearoa New Zealand’s low growth in productivity and incomes is due to low levels of diffusion of innovation from the most productive firms globally to the most advanced or “frontier” firms in Aotearoa New Zealand, and then to firms away from the frontier — the so-called “laggard” firms.

An important focus of considering this topic should be the role of management, governance and leadership in adopting new innovations and what capabilities they need. Management capability was identified as an important factor in the successful adoption of technology by the Productivity Commission’s Future of work inquiry. Current evidence suggests that management practices are average in Aotearoa New Zealand firms and are not improving. Governance and leadership practices are also likely to be important because of their role in developing long-term strategies to improve business performance. 

The topic could be expanded to look at other barriers raised by the Future of work inquiry as preventing innovation adoption and diffusion in Aotearoa New Zealand (New Zealand Productivity Commission, 2020). These include difficulties of learning from others (due to Aotearoa New Zealand being a small and distant economy with a small base), a lack of complementary skills, the low presence of large firms in Aotearoa New Zealand (which tend to be early adopters), and low levels of competition in many Aotearoa New Zealand industries.

In addition, work in this area could focus on what support or ecosystem small to medium-sized businesses need to encourage them to innovate by adopting new products, processes or business models.

4. Land use

Land use underpins the operation of society and the economy, with decisions relating to land use directly affecting multiple sectors (for example, housing and agriculture) and large proportions of the population, and having economy-wide impacts. 

Existing patterns of land use^[11] (Ministry for the Environment, 2007) across Aotearoa reflect the outcome of multiple generations of decision making at all levels (individual, business, locality, region, and state). Currently Aotearoa New Zealand is unlikely to be making the best use of its existing land resource, given known challenges such as housing affordability and the anticipated impacts of climate change. The challenges may include (potentially significant) barriers that may prevent land from being made available for its “best use”, limit easy transfer between uses, or inhibit adoption of more sustainable practices within an existing land use. In addition, climate change, natural disaster risk and other environmental challenges shed new light on what “best” (or even viable) use may mean, both now and in the future.

There would be value in exploring the concept of “best use” of land, and how existing settings may hinder or enable effective and efficient allocation of land as a resource for its most productive long-term use. Core questions would likely be to what extent land-use decisions should be driven by market price signals, which tend to have a short-term horizon and do not adequately capture the externalities of land use decisions; and what level and type of regulation is desirable to achieve the right balance between market and non-market signals. 

This issue could involve consideration of:

• The different forms of land use, and how patterns of land use vary across Aotearoa New Zealand.
• The value derived from different forms of land use, and how these values interact. This would include value derived from economic activity, as well as the human, social and cultural value derived by non-market forms of land use.
• The challenges that Aotearoa New Zealand currently faces with respect to existing patterns and trends of land use, as well as the anticipated challenges to come, particularly as a result of climate change affecting the ability to continue to use land that is currently available and/or to use land in the same way as currently.
• The incentives, including barriers and opportunities, that exist for decision makers at all levels to make choices to change existing patterns of use.
• The key systems and regulatory settings that drive these incentives, and how they interact. 

5. Energy system transformation

The energy system underpins Aotearoa New Zealand’s economy and society, and involves critical infrastructure. Aotearoa New Zealand needs to transition to have a more sustainable and resilient energy system to adapt to the challenges of climate change, such as greater exposure to extreme weather and as part of the shift to a low-emissions economy.

Making the energy system more resilient and sustainable^[12] will have significant impacts on productivity and wellbeing. Multiple sectors rely on the energy system, including key parts of Aotearoa New Zealand’s economy, including manufacturing, construction, and light vehicles and other transport. On the supply side, transforming the energy system is likely to disrupt existing industries and communities and potentially create new industries. This presents major challenges and opportunities for creating a just transition and driving economic development. 

The primary value add of this topic area would be to focus on the pace of transition to a sustainable and resilient energy system. A faster transition would result in greater disruption to the energy sector. This would require a faster phasing out of fossil fuel energy alongside a phasing in of wind, electricity, hydrogen, the electrification of transport and industry, and improved energy efficiency. Greater policy action will also be required – for example, to tax, adapt pricing mechanisms, or capture and regulate environmental externalities. 

There is value for the topic to explore key factors that both drive and determine whether Aotearoa New Zealand should aim for a gradual or rapid transition. A key factor is technology growth, as there will be technology differences that affect cost (and expected cost) of existing and new technologies. Other considerations would be jobs, health, climate change, geopolitics, pressures from civil society, and vested interests in and beneficiaries of the existing and new energy system. It will be important to minimise the avoidable costs of transition and take into account the distributive impacts due to “sunset” (declining) and “sunrise” (new and fast-growing) industries, how to support economic development, social licence for the transition, and to examine the market structure of the energy sector. 

6. Readiness of regional economies and labour markets for transition

Aotearoa New Zealand’s economic future is likely to be more uncertain and more volatile than in the recent past. Understanding how regional economic development policy in Aotearoa New Zealand could help or hinder overall economic performance, and support regions to respond and adapt to change, is important within this wider context.^[13]

Thriving regions and communities are not only important for overall wellbeing and productivity outcomes, but also for the geographic distribution of wellbeing outcomes across the country. The strength of regional economies and labour markets also influences broader regional outcomes and can be a form of resilience in the face of challenges, including the ease of transition to new approaches.

Aotearoa New Zealand’s current approach to supporting regional economic development and the performance of regional labour markets is relatively ad hoc, and focused more on current opportunities and challenges than the need to build long-term resilience and adaptability. This topic would provide an opportunity to:

• set out the role and value add that functional economic regions and labour markets play in relation to Aotearoa New Zealand’s productivity and wellbeing performance
• consider the role of the Māori economy in these functional economic regions
• look to the future challenges that regional economies and labour markets are likely to face, and identify how well-positioned they are likely to be in the face of these challenges
• identify what needs to change – including in the interactions between central and local government, and the regions – to ensure productivity and wellbeing for regional communities now and over time.

The relationship between local and central government would be an important consideration in an inquiry of this kind, particularly linking to the work coming out of the Future of Local Government review.

7. The care economy

Almost everyone is likely to require care during their life, especially when they get older. Some people may require more help than others with their everyday living because of a disability, health condition or illness. The demand for care is likely to increase in the future as the population ages, which could impact on the productivity and wellbeing of the care workforce, those being cared for, and the broader economy.

The care economy includes paid and unpaid care services:

• Paid services are provided by government and the private sector and include institutions (for example, retirement homes) and staff (for example, nurses and personal care assistants).
• Unpaid carers are people who care for friends, family, whānau and aiga members, and are a hidden workforce without whom the health system would not be able to cope with the extra demand for its services. Unpaid care also carries other economic consequences – for example, through constraining people’s ability to participate elsewhere in the economy. In 2020, the estimated economic value of unpaid care work in Aotearoa New Zealand was $18bn or 5.4% of GDP (Heyes & Grimmond, 2022).

The lack of visibility of unpaid care work means the government lacks the information to understand the contribution unpaid care work makes to productivity, the economy and to the wellbeing of individuals, families and communities. The lack of visibility also means the government is not able to plan and support the future supply of care work in Aotearoa New Zealand because it does not know the number of unpaid care workers, and who they are. 

This topic would provide an opportunity to add value by understanding how unpaid care work underpins economic and social activity and how this could be reflected in policy settings. Core elements of the work could include:

• Building understanding of the size and structure of the unpaid and paid care sector in Aotearoa New Zealand, and its impact on productivity and wellbeing
• Examining how individuals, businesses and government respond to incentives that influence the demand and supply of unpaid and paid care work
• Identifying how the sector needs to adjust to a changing Aotearoa New Zealand population. For example, while there is general agreement that the demand for care will increase, there are likely to be differences on how to meet future demand and what role unpaid and paid care should play.

8. Skilled employees and lifelong learning

Skills and education are a significant driver of productivity across all economies. Having the right skills in the labour market, and an adequate supply of these skills, supports economic growth and stronger wellbeing outcomes across society. Skills are gained in a range of ways, both formal and informal, in-work and in the education system, and over different parts of a person’s lifetime.

Increasingly, labour market trends globally and within Aotearoa New Zealand point to the importance of “lifelong learning” (OECD, 2021b),^[14] including to respond to changes in the nature of work and structural shifts in the economy. However, current barriers may limit the extent to which workers in Aotearoa New Zealand engage in lifelong learning opportunities. These depend on the types of upskilling being sought, and can vary across individuals, groups and industries. Some key barriers are financial cost, time needed to participate, and employers’ ability – and willingness – to support or deliver training. 

In this context, there would be value in specifically considering skill acquisition after formal education, including through on-the-job training. In particular, such consideration could support better understanding of where and to whom the benefits and rewards of such skill acquisition accrue, and therefore how costs and risks might be best allocated to support productivity and wellbeing gains for individuals, workplaces and society. This understanding could support development of a more “principled” approach to investment in lifelong learning over time.

Taking an economic lens to this participation challenge would support stronger understanding and could inform future decision-making at all levels – how learning is funded and delivered (largely at the government/industry level), how learning is incorporated within workplaces (decisions made by businesses/firms), and how and whether to engage in learning (as an individual worker). A key issue to consider would be the role of signalling in relation to skill acquisition. One example is the different risks and rewards associated with the different decision-makers regarding gaining a skill rather than having that skill recognised through some form of credential.