We’ve written quite a bit about agglomeration economies, as they’re one of the most important forces shaping urban life. Agglomeration economies refer to the benefits of proximity for economic and social interaction – when you’re around more people, it’s easier to meet the right person (for business or relationships!), easier to share knowledge, and easier to do things in general.

One “stylised fact” from the economic literature is that cities that are larger and better connected – i.e. denser and/or easier to get around – tend to be more productive. When it comes to economic performance, size matters. This benefits firms and workers, of course, but it is also good for consumers. For example, if you want to see a lot of rugby tests, you’re better off locating in Auckland than in Taupo, because test matches tend to go to where the people are. And if you want more restaurants and groceries, live in a denser neighbourhood.

However, economists have focused on agglomeration economies in production as they’re often easier to measure. For example, a few years ago the New Zealand economist David Maré estimated an “Auckland productivity premium” of around 50%. That means that firms located in Auckland are around 50% more productive than similar firms located in other regions. The premium was even higher for Auckland’s city centre.

In subsequent work, Maré and a collaborator, Daniel Graham, estimated that New Zealand had an “agglomeration elasticity” of around 0.065 (averaged across all industries). What this means is that places that are 10% denser tend to be around 0.65% more productive, all else equal.

But what does this mean in practice? How much does agglomeration contribute to the New Zealand economy? Is it a big deal, or not that important in the grand scheme of things?

To get a rough idea, I calculated changes in the “effective density” of jobs in Auckland over the period 2000-2015, taking into account the location of jobs within Auckland (from Stats NZ’s Business Demographics data) and the distance between job locations (calculated using GIS tools). I followed Maré and Graham’s formula for job density as a function of weighted distance to jobs in nearby areas – for the precise formula see equation 2 on page 12 of their paper.

Here’s a map showing how effective density of jobs changed over the whole period. Darker blues indicate higher percentage increases.

Almost everywhere in the Auckland urbanised area became more accessible to employment over this period – the rising tide of urban development lifted all boats. On average across the region, effective density rose by 29%. However, increases were faster around Albany and the upper North Shore, which saw rapid development, and slower in the western isthmus and west Auckland.

Auckland effective density 2000-2015

So things have changed quite a lot. The following chart shows that these changes happened incrementally over time. It shows the effective density of employment for the average job in Auckland. In 2000, the average job was proximate to around 71,000 other jobs. In 2015, that had risen to slightly less than 92,000 jobs.

Auckland effective density 2000-2015 chart

So job density has gone up quite a lot over the last 16 years as a result of Auckland’s growth. What effect has this had on productivity?

As a point of comparison, I estimated changes in GDP per employee over the same period. (I used Stats NZ’s employment data, regional GDP statistics, and GDP price deflators for the whole country. This isn’t a perfect estimate, as I’ve excluded self-employed people and haven’t corrected for part-time employment, but it’s not miles off.) Here’s what that looks like. Over the entire period, GDP per employee has risen by approximately 14.4%. The city’s economy currently produces around $88.3 billion in output.

Auckland real GDP per employee 2000-2015 chart

By comparison, Maré and Graham’s agglomeration elasticity of 0.065 implies that a 29% increase in job density is associated with a 1.7% increase in productivity (calculated using an arc elasticity formula: (92,000/71,000)^0.065-1). The true figure may be higher, as Auckland is specialised in industries that benefit more strongly from agglomeration economies.

In short:

  • Roughly 11-12% of the total productivity growth in Auckland over the last 16 years is due to increased agglomeration economies
  • In the absence of increased agglomeration economies from scale and density, Auckland’s economy would be around $1.4 billion smaller.

A wide range of other factors – increased skills, investment in capital goods, improved business practices, and changes to the composition of Auckland’s economy – also make important contributions to productivity growth. However, the contribution of agglomeration is significant – both in dollar terms and as a share of the city’s overall productivity growth. In the long term, those tenths of a percent add up to quite a lot. If we want a wealthier New Zealand, we need better, more productive cities.

Policymakers can do a lot to enhance – or undermine – agglomeration economies. For example:

What do you think about agglomeration economies in Auckland?

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  1. Auckland is great.

    Agglomeration economies in Auckland are great.

    Posts about agglomeration economies in Auckland are great.

    Writing comments on posts about agglomeration economies in Auckland is great.

    Sitting in Amsterdam while writing comments on posts about agglomeration economies in Auckland is great.

    Amsterdam has greater agglomeration economies than Auckland.

    Amsterdam is greater than Auckland.

    Amsterdam is great.

      1. There is lots of grass in Auckland. In fact the council requires us to mow even the bits in the public spaces outside of our private boundaries.

        1. In medieval times, villages were responsible for repair of the nearest section of the king’s highway

  2. Methodological question if “job density as a function of weighted distance to jobs in nearby areas” does the weighting formula increase changes in time to travel a particular distance?

    I.e. let’s say I live in an apartment building on the 10th floor, with 1 job on the ground floor. The elevator works. 5 years later there are 5 jobs on the ground floor but the lift is broken so I have to walk.

    1. And here’s my answer (perhaps lazy commuter would be better)
      “Distance may be measured as Euclidean (straight-line) distance, by road distance, or by travel time. Travel time adjustments reflect the generalised cost of distance, and the impact of congestion in reducing the influence of distant employment density. ”

      Which did you use?

    2. Good question! Most studies of agglomeration economies use *physical* proximity, rather than transport-weighted proximity, due to the difficulty of measuring transport accessibility over time.

      There are a few exceptions – for example, this paper by two Australian economists uses modelled travel times. Their estimated agglomeration elasticities are pretty similar to the NZ estimates..

      I’ve done some work on transport accessibility in NZ and Australia, measuring how fast you can get between locations by PT and car, taking into account congestion. However, I stuck with a physical measure of proximity for this analysis because I don’t have a time series of accessibility changes over the last 16 years – good PT schedule data and GPS data on car speeds is a relatively recent invention. As we get more years’ worth of data, more sophisticated ex-post analyses of the impact of transport investments on agglomeration will become possible.

      1. The reason I ask is that one might posit (and I’m sure others have done so) that one can have denser job opportunities and yet time to access them increases; they are closer yet further away as transport linkages are broken/congested etc.

  3. Legalise the grass, manufacture it, export it, TAX IT!

    Wait wrong blog

    Productivity is a concern though https://voakl.files.wordpress.com/2016/01/2015-productivity.jpg with it in negative figures according to the Auckland Plan annual updates. This is even with Auckland moving from 34% of national GDP to now 37% according to Stats NZ (as of 2015).

    Now we know you guys have covered agglomeration for the City Centre (and Auckland) so I was thinking has anyone got any material for the agglomeration of South Auckland. That is the concentration of the big heavy industrial complexes and the start with Manukau City Centre. This is especially with Panuku bringing out their Transform Master Plan to the Auckland Development Committee this week.

    1. One of the hidden downsides of intensification is that it will make it harder for mom-and-pop grow ops to flourish in the city. It’s hard to hide a grow room in an apartment complex. I guess we’ll need to extend the Northern Motorway further to enable Northland’s struggling small farmers to transport their illicit wares south.

      On your question about the south, the map I put up here suggests that all areas of the city have experienced increases in effective density. It’s not a case of the centre benefitting and the fringes hollowing out. What that means for productivity is a bit less certain. If you look at Maré and Graham’s paper, you’ll see that manufacturing and distribution industries tend to have lower agglomeration elasticities than white-collar occupations (and retail). So it’s possible that there’s been a lower impact – hard to tell without going and doing the numbers.

      One offsetting factor is that manufacturing industries tend to experience higher productivity gains from investments in plant and machinery. So on the whole, the South may have experienced higher rates of productivity growth (at least in some industries) in spite of lower gains from agglomeration.

  4. The Auckland Plan of the current council is to oversupply greenfield in exurbia and undersupply greenfield to Auckland. It takes the merits of agglomeration and buries it in Silverdale, Kumeu, Warkworth and Pukekohe – maximising growth far from the city. Greater supply of greenfield to Auckland and a lower supply to Warkworth, would create a superior agglomeration value.

      1. True, but the pre-existing population in Auckland is slightly higher than in Warkworth.

        However maybe I’ve been looking at all this wrong, perhaps the way we are shovelling investment into the exurbs is the way forward.

        1. But that would suggest that only large populations deserve to grow and benefit from aglomerwhateverthefuckitis?
          Warkworth is a town in its own right so perhaps the expansion of Warkworth is the expansion of Walkworth. Not Auckland.

        2. Warkworth is planned to undergo a greater than 120% urban expansion in the next 25 years. Auckland is planned to undergo a period of limited urban expansion (about 10%) in the next 25 years.

          The price of new sections in Auckland is higher than in Warkworth. If they were both undergoing the same degree of natural expansion, prices would be similar.

        3. Yep it is Auckland’s problem, however Warkworth and Auckland are in the same region paying rates to the same council. If the gains for Warkworth do not exceed the efficiency losses for Auckland (and they seem unlikely to) the burden will be felt by the Auckland region as a whole. Auckland is taking on some large debts that are presumed to be viable based on high growth in Auckland, if that growth is retarded the Auckland region will be left with a lot of wasted borrowing

          Pokeno and Warkworth are both likely to do well out of Auckland’s problem in the short term. In the medium term Warkworth is likely to be stuck with the bill.

          If you are in Warkworth and plan to leave before 2020-2025, it’s a good thing.

  5. And yet here is the thing. The plot of changes in job density show the most growth occurred in places like Albany, Silverdale and East Tamaki. In these places there was cheap flat land that had been reserved for employment through zoning (yes the Z-word). Presumably these employers all went there because the benefits outweighed the costs. The jobs didn’t go into twee little mixed use buildings beside stations and these jobs didnt go into the CBD. Again presumably the benefits must have outweighed the costs. Maybe these employers got all the agglomeration benefits they they require being within Auckland but on the periphery.

    1. Here’s a chart of job growth at the local board level over the 2000-2015 period: http://greaterakl.wpengine.com/wp-content/uploads/2016/04/Auckland-employment-change-by-local-board-2000-2015-chart-600×600.jpg

      Waitemata local board added the largest absolute number of jobs, while percentage growth was faster in Upper Harbour and Howick as they had fewer jobs at the start of the period.

      With regards to your point about the agglomeration impacts of different growth patterns, wait for next week’s follow-up post!

    2. Yes, noticed that pattern too. Makes sense though, you’ll always find your light manufacturing/warehouse/distribution activities (that are typical of Albany etc) will always move to the periphery where land costs are lower. It would be interesting to see in what type of businesses employment growth has occurred (as I think this will give you a good idea of where it will occur in the future).

    3. So growth location follows zoning, what a surprise, growth grows where it can. What if the zoning is distortionary? Well of course it is, that’s what it’s for, stopping people doing things they might want to, somewhere.

      But what if it is badly distortionary? And there is evidence it is, preventing or slowing a whole lot of potentially productive economic activity to suit the niceties of various previous rule setters or current cranks. And of course that is likely too, all current laws and regulations are from a previous age and some or many are likely to be at least irrelevant or counterproductive now.

      There is good evidence that we are severely over zoned now, especially that much work now has few destructive externalities beyond vehicle traffic generation.

      1. The only activities the Rosedale zoning stopped from going in was retail and residential. retail as the wanted it in their centres and residential so residents wouldnt stop the office/warehouse activities. Clemows Orchard was the exception where they let houses on a business zone. Maybe zoning actually works. Perhaps mixing activities just makes it harder for everyone. The residents prefer less noise and traffic and the businesses dont want neighbours at home complaining about them.

        1. I could not disagree more. Mixing is exactly the best of everything. That is the very definition of the form suited to unlock agglomeration economies. The whole city should be Mixed Use by default, and the argument to zone a place exclusively for fewer uses would need to be strongly made. Tidily separating everything apart directly causes the stupidity called traffic congestion. Over-zoning is an anti-urban, anti-prosperity nightmare. The Victorians new how to do it; and the property market agrees; the result is Ponsonby, or at least is much more Ponsonby than Botany.

        2. If you can make a tannery commercially viable in inner-city Auckland, sure, go ahead!

        3. If you can make an apartment block commercially viable in inner-city Auckland, sure, go ahead!

        4. You might disagree Patrick but the statistics prove that most businesses preferred to locate where mixed uses wasnt the norm. The whole twee mixed use stuff just hasnt really worked very well. From a developers view either residential is in the money or commercial, not both simultaneously. The boundary conditions dominate. From a tenants point of view they prefer to put their office beside their warehouse not beside other people’s homes. All the urban design claptrap of the last 20 years hasn’t worked except in a few little examples.

  6. Perhaps we could have a graph showing real GDP per employee tracked against house prices?

    This would enable everyone to see how the benefits of agglomeration stack up against the negative of jamming ever more people into the same sized space.

    At the very least we should be comparing with other cities. I strongly suspect we have a higher educated population which would account for most of the gains.

    1. Agglomeration economies are typically calculated on the basis of proximity *between* firms, not the density of households. So your point about “jamming ever more people in” is basically irrelevant.

      Also, the people who measure them are usually careful to exclude factors like education/skills and industry composition. Cities are more productive *even after* accounting for skill levels.

    2. Other thing to point out is that ceteris paribus rising house prices is not necessarily a negative. Its actually an indicator of economic benefits when it reflects changes in fundamentals such as income. Different story when price rises have been driven by regulatory controls of course. That is the cause of high house prices – not agglomeration.

      1. Rising prices for any good are worse than stagnant prices surely? The good generates a fixed level of utils, I want those utils for the lowest cost

    1. Reddell’s confusing the signal with the noise. The signal is that agglomeration economies do enhance productivity. That’s an empirical fact, backed by lots of research from many places.

      However, the “noise” is everything else that’s going on in the economy. That can make it hard to read the signal by looking at statistical aggregates like regional GDP. As I point out in the post, agglomeration economies account for perhaps 11-12% of Auckland’s recent economic growth – roughly one-tenth of a percentage point a year. While small gains compounded over long time periods add up to large numbers, they are often difficult to observe in the short term.

      Finally, Reddell knows very well that productivity gains happen at the margin. Enabling agglomeration economies is one such “margin”, but there are a myriad of other “margins” that we should pursue. For example, New Zealand’s poor management practices inhibit productivity, as do its weak international connections and low investment in knowledge-based capital and R&D.

      And I think his feelings about immigration is more motivated by his cultural conservatism than good economic analysis, but that’s a separate topic.

      1. Thanks for the reply.

        Do you agree there is not strong evidence, to date, that productivity growth in Auckland has been massively higher than in the rest of NZ?

        How about productivity levels? Eg What’s your read on how the productivity advantage of Auckland vs RoNZ compares to global cities like London, Sydney etc.

        Take your point that agglomeration is just one factor affecting productivity. The natural question is then – if agglomeration is boosting productivity in Auckland, what other factors account for the lower growth in GDP per capita than the rest of the country?

        1. With regards to the international position: Auckland’s got the best prospects for good international connections of anywhere in New Zealand. International airport and seaport; high share of population born overseas; reasonable amount of international investment. But _everywhere_ in New Zealand is relatively remote. So I would expect Auckland’s productivity levels to persistently lag behind cities in more proximate parts of the world. (As economic geographer Phil McCann has previously argued. See here for Shaun Hendy’s discussion of his arguments.)

          Here’s a few of the structural factors that might cause Auckland’s productivity growth to have lagged behind other regions over the last decade:
          * Age structure of workforce – Auckland has a relatively young population, which is good in the long run but right now may mean lower skill or experience levels
          * Uneven education outcomes leading to skill mismatches – Auckland’s got some very poor areas and some very rich areas, and not always that much in between.

          And there are also cyclical factors that may play a role:
          * Downturns in employment after the GFC – according to Stats NZ data, Auckland’s employment rate dropped substantially below the national average in 2009-2011
          * Commodity prices – Auckland didn’t really participate in the dairy boom that buoyed regional economies during the 2000s and early 2010s.

          I think it’s also possible that house price dynamics have been “crowding out” productivity gains in Auckland. But that’s not really a failure of agglomeration – it’s the result of other policy missteps.

        2. Auckland Council policy is severely curtailing the outward growth of the Auckland City urban agglomeration, preferring to hasten the expansion of several external smaller centres. This has created cost inefficiencies which are highly detrimental to the construction industry.

      2. My analysis of the economic impact of New Zealand’s immigration policy over 70 years is firmly rooted in the analysis of NZ’s overall economic performance, and the stylized facts thrown up as part of that performance (persistently high real interest rates – or excess demand, damped by regulation in the earlier decades – and a persistently overvalued exchange rate. If you would care to engage with any of the analysis in my original 2013 paper I would be interested in any counter-arguments/evidence etc

        More generally, I’m not sure what the “cultural conservatism” means here. I suspect the average immigrant now is probably more culturally conservative in many dimension than the average NZer, and the average immigrant over 1945 to 75 (a period my argument encompasses) was pretty reflective of the population already here.

        Having said that, I suspect that many of those arguing in favour of high immigration do so as a reflection of their cultural liberalism. We should all try to examine the evidence and NZ’s specific experience.

        1. I freely admit that my support for more immigration reflects my (classical) liberalism. For example, read this. It’s pure Rawlsian “veil of ignorance” stuff. Immigration tends to makes individuals who migrate significantly better off. That’s an important consideration to me. Others disagree, which is fair enough.

          I think your position boils down to “productivity would have grown faster if we’d restricted migration more over the past three decades”. Perhaps that’s true. Perhaps the opposite is true. We can’t observe the counterfactual.

          My prior assumption, which seems supported by an admittedly non-comprehensive skim of the international literature, is that immigration has had modest effects on productivity growth at most. (Which could be either positive or negative.) For example, research from OECD countries seems to suggest that the net effect of migration on productivity is small at best, while long-run impacts on unemployment are marginal and probably better addressed by keeping product and labour markets flexible.

        2. Yes, I agree with your read of the international iterature. So the question for NZ is how that general literature applies to the actual NZ experience over the last 70 years. Relatedly, there is the search for a compelling narrative of NZ’s underperformance over the decades. I think our immigration policy has played a material role in explaining it, in a narrative that explains as many as possible of the stylized facts of NZ.

        3. Glad I haven’t catastrophically misread the literature! But yeah, you’re right that the NZ experience may vary from the international experience. I’d be surprised if it varied by a large enough amount to explain the majority of NZ’s productivity underperformance, though. (But I have been surprised before…)

          Perhaps it’s just my subfield bias speaking, but I tend to agree with Phil McCann’s hypothesis that NZ’s economic geography explains a lot of its underperformance over the last generation. We’ve always been located in the South Pacific, but the global economy’s changed in ways that make that more of a disadvantage. (See e.g. this Ed Glaeser paper.) Lower transport costs and trade barriers have made goods-producing industries more footloose. ICTs and other technological changes have made urban service industries more productive, but face-to-face proximity turns out to be a _complement_ for ICTs, which has disadvantaged distant places.

          That being said, I also try to resist the tendency to search for “one big explanation”. Economies are complex, and it’s perfectly possible for them to go slightly wrong in a lot of places. For example, poor management also seems to be a significant issue… and one that NZ’s managerial class is intrinsically badly suited to address.

        4. Re your comment on McCann, I have considerable sympathy for his story, which is why I think it is economically crazy to be pursuing policies that have the effect of rapidly driving up the population, in a place that is at such a locational disadvantage. My take on location is that we have always been at a big locational disadvantage, but that it didn’t matter much when there were very few people (to spread the natural resource advantages over).

          Mine isn’t a single explanation: it is about the interaction of factors, including policy factors (such as the role of immigration policy).

    2. We are going backwards at the moment. Brian Fallow says “So while national output grew 2.5 per cent last year, national income (real gross national disposable income, to give it its mouthfilling title) grew by 1.5 per cent. And when adjusted for population growth, that meant national income per capita contracted by 0.4 per cent. It fell. It shrank. It went backwards.” http://www.nzherald.co.nz/brian-fallow/news/article.cfm?a_id=16&objectid=11614724

      Wespac’s Dominc Stevens is saying immigration will fuel the house price boom and undermine prospects for unskilled people.

      Concern about the very high level of immigration shouldn’t be dismissed as xenophobia.

      1. Those immigrants must be:
        A – really rich, so rich that they can buy anything they want.
        B – competing with unskilled workers for jobs.

        That is an odd combination.

        1. It is odd to have such a wide diversity in migrants. When thinking about migrations, mostly the migrants seem predominantly one or the other. It is unusual to have such a balance.

        2. I think Dominic Stevens’ point was that employers have a choice between unskilled locals or quite highly skilled immigrants so they opt for the latter rather than training people. It is the unskilled who suffer most from a competition they can’t win.

        3. So maybe NZ should think about spending more on education and especially on encouraging people to do more technically skilled qualifications. Rather than this obsession with cutting tax and, as an inevitable consequence, services to the community like education.

          If need be, let’s target valuable technical skills for free education and leave oversubscribed and largely unproductive qualifications (like law – I speak from experience) to be paid by student loan.

          I personally dont think anyone should come out of nursing or a trade apprenticeship with any debt.

  7. I would be interested to see this broken out by industry, and compared to other cities. My experience of working in IT in Wellington and Auckland is that it is much easier to get business done in Wellington. Other businesses in Auckland are scattered around the isthmus and you probably can have one meeting in the morning and one in the afternoon, realistically. You can easily double that in Wellington, on foot, as most people you want to talk to are in the compact CBD.

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