It’s exam season for high school students. So, for 10 points explain how the following statement (in the ACT-National agreement and repeated uncritically by the media) can be true,
closing the income gap with Australia by 2025… will require a sustained lift in New Zealand’s productivity growth to 3 per cent a year.
– productivity is just one factor in GDP (production = inputs x productivity, basically the amount produced depends on how much you put in times how much you get out per unit of what you put in)
-productivity growth tends to move in the opposite direction to the amount of labour and capital input growth – ie. productivity actually usually increases faster when GDP growth is slack or after a recession and productivity growth slows when GDP goes through a sustained period of rapid growth
– incomes (ie. wages and salaries, the price of labour) is a result of supply and demand for labour, not the productivity of labour. Indeed, wages usually increase fastest when there is a shortage of labour and rising demand while productivity increases fastest when there is an abundance of labour and falling demand (because only the ‘highest quality’ labour is used).
For extra credit: why is it that the supposedly economy-focused political parties and the business/political media seem to lack a fundamental understanding of economics?
[Update: I should add that I am not, of course, against productivity growth. I am just against people buying the idea it is some kind of panacea. There are very good reasons why the Right has chosen to focus on productivity: every other metric of economic performance has been too good. We have outgrown our trade partners, unemployment has ben at record lows, and wages risen have risen at record rates. Productivity growth is counter-cyclical, slow when the economy is at full tilt, so it has been a useful stick to hit a government in good times. It is also useful because it can be claimed, usually without evidence, that government regulation -ie work rights – is impeding productivity; if you wnat to remove work rights, first argue we need faster productivity growth]