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Aussie pay gap reflects low-skill kiwi managers, workforce: NZIER

Friday 30th September 2011

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The growing income gap between Australians and New Zealanders has more to do with poorly skilled managers and workers than anything to do with Australia’s “lucky country” status and reliance on heavy industry, says a new study from the New Zealand Institute of Economic Research.

“Despite often-voiced concerns to the contrary, capital intensity is not the main thing we should be concerned with when worrying about the growing income gap with Australia,” says the report, penned by NZIER economists Qing Yang and John Stephenson.

“New Zealand’s principal problem is multi-factor productivity – the quality of management, organisational innovation, the production process, and the quality of labour and capital.

“The significant differences ... indicate the need for more focus on the quality of labour, capital, and management, and regulatory environment,” the report says. “Simply investing in more capital is of secondary importance.

“This contrasts with the character of debate in New Zealand, which is usually about quantities: of jobs and of locally raised capital and savings rates.”

The paper has one major surprise beyond debunking the widely held view that Australia’s relative wealth is down to its mineral riches. It finds the New Zealand mining sector has a better productivity record than the Australian industry, despite the relative importance of mining to Australia’s economy.

However, it says the reason for this is“unclear.”

Better productivity is also apparent in the electricity and utilities industries, the study finds, although “all too few”such examples exist.

Instead, service industries such as construction, transport, wholesale and retail trade, community services and the finance sector all seriously underperform against their Australian counterparts.

That matters not only because service industries make up 70% of the New Zealand economy, but also because of “its crucial importance to the post-industrial societies,” say the NZIER researchers. “This is a problem that needs a serious second look.”

Only in the transport sector does capital intensity appear to explain New Zealand’s lower productivity record.

The newly formed New Zealand Productivity Commission is already examining parts of two of the laggard sectors – housing construction and international freight-forwarding.

NZIER’s best guess at explaining the differences elsewhere is that “it may be that much of New Zealand’s productivity growth gap is due to the fact that lower skilled labour in Australia has, at the margins, found a home in mining while in New Zealand it tends to end up in the services sector.

“Higher skills, management capability, and organisational quality will have a potentially profound effect on New Zealand’s growth potential because they improve the overall economic environment and increase New Zealand’s capacity to innovate,” the report says.


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