Still Plenty of Scope to Get People into Work

Please find attached a Business Forum column that appeared in the Dominion Post today, 30 April

Still Plenty of Scope to Get People into Work

There is confusion about why the economy did well from the early 1990s; why the outlook is now poorer; and why we could do better not just through higher productivity growth but also by getting more people into the workforce.

Some of the confusion arises because commentators fail to distinguish between business productivity, which is measured and grew strongly from 1992 to 2000, and public sector productivity, which is unmeasured and likely to be poor. Economy-wide indicators of productivity are misleading as indicators of business productivity

There is also confusion about the sources of output growth. Reacting to the abysmal figures on recent business productivity growth, David Skilling of the New Zealand Institute said, “Most of New Zealand’s economic growth in the last 15 years had been achieved by growing the labour force … productivity growth has only counted for a third of the overall growth, while the other two-thirds has come from getting more people working longer hours.”

However, the Statistics New Zealand figures for the measured sector of the economy indicate that under a quarter of output growth has been due to increased labour supply. As the release stated, “From 1993 to 2006, GDP growth was relatively strong, averaging 3.8 percent on an annual basis. This reflected positive growth from all three contributors: labour input contributed 0.9 percent annually, capital input contributed 1.2 percent, and multifactor productivity increased 1.7 percent on an average annual basis.”

Brian Easton made the same error when he wrote that “we have to move from a low productivity growth/labour extensive growth strategy to a high productivity one because the sources of additional labour are running out.”

But New Zealand’s measured productivity performance since the early 1990s is shaping up as a game of two halves. The trend annual rate of growth in labour productivity in 1992-2000 was 2.7 percent a year and trend multifactor productivity growth was 2.3 percent.

During the present government’s term of office, these figures have slumped to 1.2 percent and 0.7 percent respectively as policies of high spending and taxation, increasing regulation and other forms of intervention have impacted on the business sector. When the productivity figures for the year to March 2007 are available, they are also likely to show weak growth.

And are “sources of additional labour” running out?

This seems unlikely. It is true that employment growth as well as productivity growth surged after the Employment Contracts Act freed up the labour market, and that unemployment fell sharply.

However, the general unemployment rate still stands at 3.7 percent of the labour force (82,000 people) while a broader measure shows that a total of 161,800 people are jobless. The Maori unemployment rate is 7.2 percent and the youth unemployment rate is 14.3 percent. The economy is well short of full employment.

There have also been increases in the numbers on sickness, invalids and other benefits. The total of all people of working age on benefits remains high at almost 265,000. Many in part-time jobs would prefer more or full-time work, and many displaced older workers struggle to get re-employed.

Factors such as mandatory unfair dismissal laws, the inability to write straightforward fixed-term contracts, and the anti-discrimination provisions of the Human Rights Act perversely militate against the interests of older workers.

While New Zealand’s workforce participation rates are relatively high, a 2004 Treasury study found that there is scope for increasing participation, especially among young women. It concluded that raising overall participation to the average of the top five OECD countries would increase employment by over 140,000 and GDP by over $6 billion dollars or 5 percent.

Regrettably, the situation seems likely to deteriorate rather than improve. As Westpac economists have recently noted, the incentives for labour force participation are heading in the wrong direction.

They suggest that the participation rate is likely to fall because the high effective marginal tax rates generated by the Working for Families package will discourage people from working. The increase in annual leave (from 3 to 4 weeks) will further restrict labour supply. They estimate that these effects, combined with population aging, will knock at least a full percentage point off yearly growth in labour input over the next 5 years.

The implications for New Zealand’s economic growth outlook are bad. With productivity growth and labour force participation both flagging, the GDP growth rate of 4 percent plus that finance minister Michael Cullen targeted in his 2001 budget is nowhere near in sight.

Roger Kerr is the executive director of the New Zealand Business Roundtable.

ENDS

© Scoop Media