New paper on increased rate of income growth

The Treasury has published a new Analytical Note today.

Examining New Zealand’s increased rate of income growth between the late 1990s and 2019 (AN 23/04)

Since the 1970s, New Zealand has had a relatively low level of labour productivity compared to much of the rest of the OECD, and has also had a low rate of labour productivity growth (again, relative to other OECD countries). While not refuting that New Zealand has challenges with productivity, recent literature provides a somewhat more positive assessment of New Zealand’s economic performance since the 1990s. This analytical note aims to build on this literature by providing a more extensive macroeconomic-level assessment of New Zealand’s economic performance in comparison with other high-income countries.

This paper provides a broad analysis of New Zealand’s average per capita income growth from the late 1990s to 2019. The paper finds that New Zealand’s labour productivity growth (real GDP per hour worked, one important source of income growth) from the late 1990s to 2019 broadly matched that of high-income OECD countries. However, New Zealand’s average per capita income growth was supplemented by additional sources of income growth beyond labour productivity, particularly a rising share of the population in employment and rising export prices relative to import prices (the terms of trade). Looking at these in more detail, the paper finds that New Zealand has had broad-based growth in employment compared to other OECD countries. Much of the rise in New Zealand’s terms of trade was attributable to rising export prices, although it has also been supported by a changing import mix.

These other sources of income growth have helped New Zealand’s average per capita incomes to somewhat catch up with those of other high-income OECD countries since the late 1990s. However, the lack of catch up in the level of New Zealand’s labour productivity to high income OECD countries remains a risk for the country’s long-term prosperity given that the other sources of income growth may not continue or could reverse in the future.