This paper examines firm multifactor productivity (mfp) growth and changing skill levels of labour in New Zealand, using NZ microdata for 2001–2012. Strong employment growth for lower skilled workers lowered average skill by 1.8% over the period, with declining unobserved skill (−3.6%) outweighing increasing observed skill (1.8%). Consequently, skill-adjusted mfp growth (0.24% pa) was higher than unadjusted growth (0.14% pa).
The impact of skill adjustment was almost entirely due to changing skill composition within continuing firms. Skill dilution was strongest pre-global financial crisis (GFC), and was reversed when employment contracted in 2009 and 2010. Adjusting for skill dilution reveals stronger procyclical variation in mfp.