Why is productivity important?

What is productivity?

‘Productivity’ is about how well people combine resources to produce goods and services. For countries, it is about creating more from available resources – such as raw materials, labour, skills, capital equipment, land, intellectual property, managerial capability and financial capital. With the right choices, higher production, higher value and higher incomes can be achieved for every hour worked.

Why does productivity matter?

Generally speaking, the higher the productivity of a country, the higher the living standards that it can afford and the more options it has to choose from to improve wellbeing. Wellbeing can be increased by things like quality healthcare and education; excellent roads and other infrastructure; safer communities; stronger support for people who need it; and improved environmental standards.

High productivity societies are characterised by smart choices about savings and investment versus current consumption; dynamic and competitive markets; openness to trade and to international connectedness; high awareness of external influences; rapid uptake and smart application of new technologies, products and processes; and increasing demand for highly skilled and creative people. These are the successful societies that attract and retain people, ideas and capital.

Why does New Zealand need to lift productivity?

New Zealand has always sought to improve its productivity to improve the standard of living of New Zealanders, and this will always be an important goal.

New Zealand used to generate some of the highest living standards in the world. Recent decades, however, have delivered a more challenging environment, with New Zealand slipping from once being one of the wealthiest countries to now around 21st in the OECD. Our productivity is now much higher than it was, but has not increased as quickly as other countries and our income growth has been slower. As a result, we collectively have fewer options for improving wellbeing than if New Zealand had performed better.

The lag in relative productivity matters a lot over time. About 700,000 New Zealanders now choose to live abroad for the living standards and options offered in other countries (such as wider employment choices, higher incomes or better quality social services).

To sustain and hopefully improve New Zealand’s wellbeing, our incomes need to grow. With New Zealanders already among the hardest working people in the OECD in terms of hours worked, improving productivity is the most likely way of achieving higher incomes. Even small increases in productivity growth, if sustained, can have a big impact on income and wellbeing.

How is productivity lifted?

There is no simple formula. Lifting productivity is ultimately the product of individual and organisation decisions about how to generate value.

There are some general foundations for improving productivity, such as respect for the law and property rights; effective governance arrangements; and an attractive business environment, including a high-quality low cost regulatory environment. These foundations require ongoing attention and improvement. A large number of other factors also matter, such as:

  • the degree of openness and competition in markets, which is important to incentivise innovation, improve allocation of resources and achieve more dynamic performance;
  • investment and other strategic choices made by organisations (eg, using new and smarter technology), which depend on the quality of governance and management;
  • the attitude and effort of employees toward ongoing training, finding business improvements and helping implement beneficial change;
  • the quality of education and the attitude of students toward the value of learning;
  • the quality of government decisions (at all levels), in setting policy and shaping regulatory environments, and deciding where public money is spent; and
  • the aspirations of individuals and families.

A country’s productivity performance is also influenced by factors that governments cannot do much about, such as size, natural resource endowment and distance from global markets. Even then, successful countries develop policies and strategies to mitigate or accommodate such factors. More generally, there is no room for complacency - ongoing improvement of the broad framework that shapes and incentivises productivity is essential.