Brian Fallow: Back to basics to boost growth

It this a sign of the times?

In the last three months of 2008 the number of employees aged over 65 jumped by 15,000 to 89,000. In fact, that change accounted for most of the 21,000 increase in the number of people employed.

Nearly 18 per cent of seniors are still in the workforce, or back in it.

In light of the wealth destruction being wrought on housing markets and sharemarkets, and the Human Rights Act's prohibitions on age discrimination, those numbers may well rise.

It is only one of the changes at work on the building blocks of economic growth: labour supply and productivity.

Our basic problem is that our productivity levels position us in the bottom third of the OECD league table, with Spaniards and Greeks, but we like to live as if we were still in the top third like the Australians.

We have borrowed like crazy from the rest of the world to fund the difference but our ability to keep on doing that can no longer be taken for granted.

So it is time to get back to the basics of earning our national living.

From a growth accounting standpoint, economic growth can be broken down into changes to the number of hours worked, the skill levels or quality of the labour force, the amount of physical capital invested per worker, and multi-factor productivity or the efficiency with which those inputs are used.

Statistics New Zealand reported last Friday that labour productivity (output per hour worked) had increased 2 per cent in the year to March 2008.

But the average rate of labour productivity growth since 2000 has been 1.3 per cent a year, only half the average rate prevailing from the mid-1980s to the end of the 1990s.

"In recent years New Zealand's productivity growth has fallen below other countries'," Prime Minister John Key told a Council of Trade Unions conference yesterday.

"That's why we are investing in infrastructure, reforming the Resource Management Act, stripping out compliance costs, investing in ultra-fast broadband and looking for better performance from the Government sector."

But lifting productivity, and with it incomes, also relied on individual workers being able to make a bigger contribution, business by business, he said.

And part of that is for Government and employers to become less tolerant of the fact that too many school leavers lack the literacy and numeracy the modern workplace requires.

Statistics New Zealand is now producing a more sophisticated measure of the labour input into the economy, which does not just count heads or hours worked but adjusts for qualitative factors such as education and experience.

It shows that the quality or average skill level of the workforce has increased over the past 10 years.

As a proportion of the population the number of university graduates New Zealand produces is among the highest in the OECD.

How many of them stay in the country is another question. But a Treasury report last year said that in 2006 19.3 per cent of the adult population had degrees, up from 11.5 per cent in 2006.

The numbers may well rise if the global recession has its expected effect in reducing the number of people heading overseas and encouraging more expatriates to return.

New Zealand's 15-year-olds compare well with those in other developed countries in terms of reading , mathematics and scientific understanding.

But on the other hand participation in education by those aged 15 to 19 is among the lowest in the OECD.

Maori and Pasifika are over-represented among this tail of underachievers, and they make up a growing share of the working age population.

So it was reassuring to hear Key reaffirm Government support for apprenticeships and industry-based training as well as its own Youth Guarantee scheme to give those aged 16 and 17 more options to make up deficiencies in their skill sets.

Growth can't just be a matter of more, or more adept, hands to the pump, however. We also have to invest in a better pump.

Research by Treasury economists Julia Hall and Grant Scobie in 2005 found that New Zealand's low productivity level compared with Australia was not because of the fact that workers are using capital less efficiently than their Australian counterparts, but rather that on average each worker has less physical capital to work with on this side of the Tasman.

The capital-to-labour ratio had been just about the same as Australia's in the late 1970s but by 2002 was a third higher in Australia than here. Just like their incomes.

So a crucial part of raising productivity and of narrowing the income gap with Australia is to reverse that trend and encourage substantially higher levels of business investment.

The short-term outlook on that front is bleak, of course. The business sentiment surveys show investment intentions at historically low levels.

But in the meantime there needs to be a debate about what changes, especially to the tax system, would encourage "capital deepening" when confidence returns and growth resumes.

The final and most difficult ingredient in the recipe is multi-factor productivity. How effectively are people and their skills and the firm's capital used?

Business new Zealand's Paul Mackay defined productivity as having the best combination of technology, skills and motivation than anyone could devise.

A lot of it, said CTU president Helen Kelly, has to do with the sorts of things union members grumble about. Like having to work with old machinery.

Or having to sit around waiting because parts are not available.

Or having a great idea but no process in place to get that idea to people at the top.

"The things that often annoy people are the things that are holding them back," she said. The irony is that productivity will rise in the short term as unemployment climbs.

Labour productivity tends to fall when labour is scarce and employment growth is strong because new workers take a while to learn the ropes and the last ones on the jobs bus have fewer skills.

That goes into reverse in a downturn.

And there is a real risk, social as well as economic, in having a cohort of unqualified school-leavers whose productive working lives are delayed or even aborted.

But at least some of the prerequisites are likely to be in place for economic liftoff when eventually global recovery arrives.

A boost in both the size and quality of the labour force from net migration, the ageing of the labour force and a rising trend in overall education and skill levels would be a pretty good start.

Add a stepped-up level of capital expenditure and managerial nous and we would have the makings of a more prosperous future.