Cities that concentrate people and knowledge have increased productivity

Supporting economic and population growth in smaller Australian cities by focussing on particular local or regional strengths has great potential to improve economic productivity, according to new AHURI research.

The research, ‘Inquiry into population, migration and agglomeration’, undertaken for AHURI by researchers from University of South Australia, University of Sydney, Curtin University and Swinburne University examines the likely optimal size of Australian cities, and the scale at which productivity benefits are likely to arise. Such benefits arise through what is known as agglomeration economies, which are the combination of cost savings, efficiencies and increased market potential that benefit firms when they locate in more heavily populated cities, higher-density cities or cities with a greater diversity of firms, economic sectors and workers.

The research shows agglomeration productivity benefits begin in Australia at a fairly small scale—in metropolitan regions with more than 100,000 people—and increase disproportionately thereafter. Population density is also important, but the effects are stronger in larger sub-metropolitan areas. This suggests that agglomeration effects operate most strongly below the scale of the whole city, but above the scale of within a neighbourhood.

‘This finding suggests there is strong potential for strategies that seek to support economic and population growth in ‘second order’ and regional Australian cities by focussing on particular local or regional strengths,’ says lead researcher Professor Chris Leishman of the University of South Australia.

‘We also found people are happy to move between metropolitan and regional areas, and within regional areas, suggesting that policies enabling mobility will benefit regional housing and labour markets. Overall, household moves are triggered by more than dwelling and locational preferences, but reflect employment, health, education, recreational and lifestyle-related services.’

Analysis of successful regional, satellite and growth-centre cities suggests there are some common characteristics: historic connections to primary industries; recent restructuring of economies; diversification into health and social care, retail and education; economic development initiatives targeting technology sectors; and the influence of having a local university campus.

There are a number of unique international approaches to planning for economic growth that could be adapted to the Australian context, including the interconnected development of satellite cities linked to major metropolitan centres; regional development of a network of decentralised centres linked to technology clusters; and identification of designated growth centres within an economic diversification strategy.

The research does find that agglomeration benefits do lead to higher wages in Australian cities and that those benefits are not totally taken away by higher housing costs; however, the benefits are received disproportionately by higher-income groups. Unfortunately, the impact of high housing costs is also likely experienced across the entire income distribution, suggesting that agglomeration economies may play an important role in widening inequalities.

‘Our research suggests government policies should emphasise investment in major infrastructure for regional areas and cities and satellite cities that have already been identified as locations of population and economic growth,’ says Professor Leishman. ‘We encourage targeted support designed to capitalise on growth opportunities, particularly economic development aligned to the knowledge-industry activities.’

‘We also see real benefits for increased support for transport connectivity between major cities and their regional or satellite cities—but we also emphasise that these policies must be offset by other policies designed to maintain or improve housing affordability in the regions’, says Professor Leishman.