Why do NZ service industries under-perform?

New Zealand's productivity watchdog is turning its attention to why service industries, making up more than two-thirds of economic activity, under-perform compared to the same sector in other developed economies.

Releasing the first of two reports for public comment, the Productivity Commission says the services sector "includes industries with the lowest levels of labour productivity in the economy and also some with comparatively high levels".

Areas such as wholesale and retail services, and "person-centred" industries such as tourism "have low productivity levels compared to most of the information-services industries".

"Average output per hour in 2010 ranged from a low of $21 in the accommodation and food services industry to around $100 or more in information media and telecommunications; finance and insurance; and rental, hiring and real estate services."

However, even information and communications technology services are tending to show lower productivity gains than comparable parts of the Australian, American and UK economies, commission chairman Murray Sherwin.

"Evidence from the US retail industry and Australian wholesale trade industry have shown a significant relationship between ICT investment and productivity growth. In New Zealand, these industries are both relatively poor productivity performers."

As a result, one of three big questions the commission is posing is whether there are barriers to the effective use of ICT in these industries and what policy changes could assist.

"Compared with the UK and Australia, New Zealand's service industries tend to have considerably lower levels of capital intensity", the report says, although around half of New Zealand's service industries have higher MFP levels than their Australian and UK counterparts.

"The positive productivity trends in some New Zealand service industries – such as information media and telecommunications – have not been strong enough to offset the weak performance of other service industries.

No New Zealand boost
"As a result, New Zealand has not received the boost to its economy-wide productivity growth that the US and some other countries have achieved from their services sectors since the mid-1990s."

One surprising area of "pretty awful" under-performance was in professional, scientific and technical services, Mr Sherwin told BusinessDesk.

"There might be measurement issues in that. We seem to have a capacity to provide scientific, engineering services and the like to the rest of the world, but the productivity looks woeful."

The report also notes that overall productivity performance "will suffer if low-productivity industries in an economy expand relative to high-productivity industries".

However, the role of such industries in creating large numbers of, albeit lower-paid, jobs meant they were important to the economy, Mr Sherwin says.

"A shift of employment into lower-productivity service industries and the expansion of these industries could thus be a contributor to New Zealand's disappointing productivity performance," the report says.

The commission's analysis of the overall shifts over time of output and employment towards low-productivity industries ... found that most growth in aggregate productivity arose from growth within industries rather than from shifts in employment and output across industries."

The other two big questions the report asks are whether there are policy options to increase competitiveness in service industries and whether current occupational licencing rules could be stifling the productivity of some service industries.

"Consumer protection is necessary in an area where it's hard to understand the services being bought, but when it protects the occupation, then you worry about it," Mr Sherwin says.

The commission will narrow down from three to two the big questions it tackles, subject to submissions, which are due by August 23.

(BusinessDesk)