Productivity is important. Understanding your region’s productivity is a key part of understanding your region’s economic development. Here we outline a framework for doing so.
What is productivity and why does it matter?
Productivity is both simple and complex. It is about producing more outputs with less inputs, something that I think most people are hard wired to want to do because the less time we spend working, the more time we can spend at leisure. We like to get our work done in less time without sacrificing quality. That can happen simply with practise. By repeating tasks over an over we become more proficient at them and complete them in less time. We can also improve our productivity if we have better tools. Take the washing machine for example. It cut the time required to wash clothes from standing over a hot tub for hours to loading the machine and pressing the right buttons in a matter of minutes.
Productivity is important to economists. We are interested in how economies put their finite resources (whether that be time, land, primary commodities technology etc) to good use. Raising productivity is about using those finite resources more efficiently. Always a good thing. There is only so much we can dig up out the ground, only so much fresh water we can drink, only so much land we can use for agriculture and to build our cities on.
Productivity is also important to policy makers, employers, and workers. More productive workers usually earn more and create more profit for employers. Higher earnings and taxes translate to higher tax revenue which can be used to improve the education and health systems and infrastructure. Which can, in turn, lead to higher productivity.
Things can get complicated when we try to measure productivity and understand why the productivity of one worker, one firm, one industry or one economy is different to another.
How is productivity measured?
A relatively simple measure of productivity is output (or Gross Domestic Product) per worker. More complex measures such as multi-factor productivity try to precisely measure the full range of inputs (time, labour, skills, technology other capital, and how they all interact) relative to outputs. But output per worker works because it is easy to measure and improvements in capital or technology, although not directly measured, should materialise in greater output per work (assuming the technology and capital is being used efficiently).
Why does productivity vary across firms and industries?
Table 1 shows output per filled job across industries in Christchurch City in 2022. I could have chosen any area as a demonstration, but I chose Christchurch because it has a relatively diversified economy. You can see in the Christchurch productivity column that productivity across Christchurch’s industries varies quite a lot from $48,112 in administrative and support services to $486,255 in electricity, gas, water, and waste services. The average across all industries is $124,244. Christchurch is by no means unique in having this diversity of productivity across different industries. You can see similar diversity in the National productivity column which shows productivity across industries nationally.
Productivity varies across industries because of how different industries produce output. Administrative and support services, which includes employment services, travel agencies, packaging services, and cleaning services, tends to be more labour intensive and employ people in lower-skilled jobs compared with the electricity, gas, water, and waste industries which are more capital intensive (think of all the infrastructure we use to generate and transmit electricity, for example) and employ people in higher-skilled jobs. Skilled people working with technology and other machinery tends to result in higher productivity and higher wages. In 2021, the average earnings for people employed in administrative and support services was $52,900 compared with $89,200 for people employed in the electricity, gas, water, and waste industries.
So, be cautious when you use the regional average productivity and compare this with other regions or the national average because you are not comparing apples with apples. The regional average is influenced by the industry make up of your local economy. If industries that tend to have higher productivity are larger in your local economy, this will raise the average productivity. If you make any comparison, it needs to be with a region that has a similar industry make up as yours.
It is useful to understand the diversity of productivity across your local industries. Economic development could then focus on developing those higher-productivity industries. But when comparing with other regions or the national average, it is usually better to compare productivity in individual industries. If only there was a framework in which we could do both…
How do I create a productivity quadrant?
The productivity quadrant is a way to quickly see both the diversity of productivity across your local industries and how productivity in these industries compare with the national average for that industry.
Calculate the ratio of each of your local industries’ productivity to your regional average (see the Christchurch industry to Christchurch average column in Table 1). Then calculate the ratio of each of your local industries’ productivity to the national average for that industry (see the Christchurch industry to national industry in Table 1).
Chart 1 plots these ratios for each industry on a scatter chart. The vertical axis shows the Christchurch industry to national industry and the horizontal axis shows the Christchurch industry to Christchurch average.
How do I interpret a productivity quadrant?
Industries that are above the value of one on the vertical axis have a higher productivity than the national average for that industry. Industries that are above the value of one on the horizontal axis have a higher productivity than the Christchurch average. It is called a productivity quadrant because it can be split into four areas with the value of one on both axes delineating those areas.
Top right quadrant: these are your highest performing industries. They have high productivity compared with other industries in the region and have high productivity compared with the national average. Try to understand why firms in these industries such high performers are and apply these lessons to other firms and industries.
Bottom right quadrant: these are high productivity industries that are under-performing. They have high productivity compared with other industries in the region, but low productivity compared with the national average. Try to figure out why productivity in firms in these industries is lower than the national average and what can be done to raise it.
Top left quadrant: these are lower-productivity industries that are performing well. They have low productivity compared with other industries in the region, but have high productivity compared with the national average. Try to understand why firms in these industries are high performers and apply these lessons to other firms and industries.
Bottom left quadrant: these are lower-productivity industries that are under-performing. Try to apply what you have learned from high performing industries about what raises productivity to firms in these under-performing industries.
All the data you need to create a productivity quadrant can be found in our refreshed Regional Economic Profile in the Productivity / Industry productivity dashboard.
In any given industry you will most likely find that productivity varies across firms. This was a finding from the Productivity Commission’s inquiry into frontier firms. The inquiry also found that high productivity firms in New Zealand have much lower productivity than high productivity firms in other small, advanced economies. If you are looking for exemplars of high-productivity firms, you might consider looking overseas.
Bear in mind that New Zealand’s small size and distance from other countries both impede our productivity growth for a range of reasons. For instance, our distance from other countries makes exporting goods and importing technology and foreign investment more challenging. And our small size makes it difficult for firms to operate at scale. All these things give larger, more integrated countries an advantage in the race to innovate and increase productivity. So, lessons learned from other countries might not apply here. For a much deeper understanding of why New Zealand’s productivity is lower than many other countries, read the Productivity Commission’s Productivity by the numbers 2023.
