This is a guest post from Stu Donovan

Why do cities grow? If you’re interested in answers to this question, then please come along to a public talk I’m giving in Auckland on Thursday 3 October from 5.00 – 6.30pm. Details below.

The main message of our research is that local amenities matter, both to firms and households.

What do we mean by local amenities? In this context, I use “local amenities” as a general rubric to describe the attributes of a location, where the effects (think benefits and costs) of the attribute depends—at least in part—on proximity. That’s a lot of things, as it turns out.

Some amenities are defined by the physical environment, such as climate, whereas others are defined by the socioeconomic context, such as skilled workers and quality restaurants. Of course, the value firms place on local amenities can differ from households. Firms, for example, may prefer locations close to their upstream suppliers and downstream customers. Households, on the other hand, may prefer locations with pleasant landscapes and good-quality schools.

In our research, we adapt and extend spatial economics models of location choice with the goal of better understanding the (static and dynamic) components of local amenities. Our model considers the choices of both firms and households between cities and over time. We estimate our model using a unique data set for approximately 130 cities and towns in New Zealand over almost 40 years.

At this point you may be thinking all of this is well-and-good but what does it mean for policy? While emphasising this remains a work in progress and without giving too much away (NB: I will post slides and a link to the as yet-unpublished working paper in a subsequent blog post), some interesting findings emerge.

First, we find local amenities matter. Like, really matter. Indeed, differences in local amenities can lead to differences in rents of around 50-100 percent. Not all locations are created equal: Firms value access to workers, especially the highly skilled, whereas households value pleasant climates (drier, sunnier, warmer) and restaurants. Places like Tawharanui, for example, can make a valuable contribution to Auckland’s attractiveness

Second, we find urban growth has regional spillovers. Most of New Zealand’s major cities are currently growing, creating the potential for further growth in proximate towns. The strength of the spillovers declines with transport costs, e.g. time and distance, creating the potential for transport policy to shape regional development. This has implications for projects like the extension of rail electrification to Pukekohe (NB: Here’s an interesting article on the latter, which is the source of the image below).

Third, we find higher rents lead to lower wages. The implication is density controls, such as height limits and parking requirements, don’t just push up the costs of development but they also suppress wages. Put another way, policies that make development more difficult can be an economic double whammy for workers, who face both higher housing costs and lower wages. As recent research by Geoff Cooper finds, New Zealand’s cities are struggle to compete when compared to our Australian friends and foes.

Incidentally, I write this from Brisbane, which offers relatively high disposable income and high amenity. While I’m here for love not “money and amenity”, the latter do make it easier to stay.

To finish, it’s worth noting that while our research is somewhat unique in the New Zealand context, it slots neatly into a growing body of international literature on the dual role of cities as places of production and consumption. The abstract to Ed Glaeser’s watershed “Consumer City” paper, for example, reads as follows:

“Urban economics has traditionally viewed cities as having advantages in production and disadvantages in consumption. We argue that the role of urban density in facilitating consumption is extremely important and understudied. As firms become more mobile, the success of cities hinges more and more on cities’ role as centres of consumption. Empirically, we find that high amenity cities have grown faster than low amenity cities. Urban rents have gone up faster than urban wages, suggesting that the demand for living in cities has risen for reason beyond rising wages. The rise of reverse commuting suggests the same consumer city phenomena.”

So even though I can’t offer you a simple, definite answer to the question of why cities grow, my upcoming talk hopes to provide insight into (1) what we think we know and (2) what we think we need to know more about. That’s the humble task I’ve set myself; I hope to see you there.

Acknowledgements: I appreciate the support of fellow researchers at Motu, namely Arthur Grimes and Dave Maré; my employer, Veitch Lister Consulting; and Te Pūnaha Matatini.

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37 comments

  1. Stuart, can you elaborate on the point that ‘higher rents lead to lower wages’? I don’t understand why this should be………..unless you mean that my stable wages buy relatively less as rents are rising? Surely firms would pay a premium to retain staff in the face of rising costs, not the other way around.

    1. Higher rents reduce the profitability of firms for a given level of production. In a competitive environment, this means firms need to reduce the quantity of floor space demanded and, to some extent, reduces the associated demand for labour.

      Basically, higher overheads >> lower profitability >> less production >> less demand for labour.

      1. Hmmmm. Not sure about that Stu. London is a prime example of the following thinking:
        higher overheads >> squeeze more people into same amount of space >> same production >> more demand for labour >> more profitability.

        1. I think you’re suggesting the direct negative effect of higher rents on firm’s output / demand for labour / wages is outweighed by the (positive) effect arising from agglomeration externalities.

          I guess that’s *possible*, although it seems somewhat *unlikely*.

          Possibly something to explore as the research progresses.

  2. Why cities grow is usually bad quick fix short term urban and transport planning based on the car, population growth, nimbyism and corporate greed.

    The classic example of this, is Auckland but other looming cases of it, is Christchurch, Hamilton and Tauranga with lessor extend Wellington which is saved by its topography and being a ‘terminal’ location for road and rail.

    We know realise that the planet is warming quicker than ever and we need to stop having ongoing talk fests whilst sitting on our hands and start some hard long term urban and transport planning of towns, provincial cities and the 6 main cities to try and future proof them of planet warming and the resulting erratic and destructive weather patterns and sea level rises.

    As of 2019, hap hazed urban sprawl must stop and be replaced with sustainable environmental friendly long term urban and transport planning, factoring increased population growth, based on cycling, walking, EV’s and integrated public transport that reduces the town/city carbon foot print and mean temperature.

    For every Km of urban sprawl, increase the town/city mean temperature and carbon foot print and the cost of shipping food and goods to that town/city.

    NZ has the room to increase its population to 20 million over the next 30 years by using sustainable environmentally urban and transport planning through decentralized population growth with out the fixation of have a fossil fuel powers cars and inefficient fossil fuel trucks.

    So lets stop having talk fests and start doing some long term planet warming future proofing.

    1. I think we’re using growth in different ways. I’m talking about economic and population growth, you seem to be talking about physical / environmental footprint. Both interesting, although this research focuses on the former.

      1. I think you missed my point. Economic and population growth is important as long as it is sustainable and environmental friendly. Economic growth of a town/city is based on SME businesses which employ local workers and population growth of a town/city increases consumption from those local SME businesses. That’s how NZ’s towns and cities grow in the 19th and early 20th centuries.

        Unfortunately, after WW2 bad quick fix short term urban and transport planning based on the car, population growth, nimbyism and corporate greed especially in Auckland has created the basket case Auckland has become in regards to wealth spread, travel, housing, social well being, etc, which has seen the decline of economic activity and social well being in our provincial towns and cities

        Nearly 60% of NZ’s population is in Auckland, Wellington, Christchurch, Dunedin, Hamilton and Tauranga which has created large gaps in transporting of goods, near collapse of inter town/city passenger travel services, etc, which is not good economically and socially for provincial towns and cities.

        The reality is, planet warming doesn’t care a damn about the theory of urban development, the need to have a car, who earns what wages, etc, the message is clear – starting adapt now or face the consequences.

        1. I agree urgent policy action is required to address climate change and sustainability more broadly. That said, I think it’s useful to understand the factors that attract people to cities and towns, if only because it helps us to understand their future growth trajectories and what sort of policies and planning might be required.

        2. Stu Donovan – Over the centuries, humans have gravitate to larger communities but humans haven’t faced a climatic change like rapid planet warming and its related erratic and disruptive climate change since the last ice age which almost wiped the human race.

          Large dense cities will be death traps for humans due to heat, storms, etc. Just looked what happened in Melbourne and Sydney 2018/2019 summer where temperatures in Melbourne reached 48deg c and Sydney 50deg c.

          What is going to happen, humans will be forced gravitate to smaller communities where it would be a bit cooler to exist.

          This is why NZ needs to start planning for 20 million people decentralised to smaller sustainable environmental friendly towns and cities, where SME businesses can provide goods/services and employment to provide economic growth for their community.

          Urban theorist like yourself need to start focusing on how communities are going to be planned to take in account a warming planet and the resulting climate change instead os planning for large dense cities.

        3. Stu Donovan – Over the centuries, humans have gravitate to larger communities but humans haven’t faced a climatic change like rapid planet warming and its related erratic and disruptive climate change since the last ice age which almost wiped the human race.

          Large dense cities will be death traps for humans due to heat, storms, etc. Just looked what happened in Melbourne and Sydney 2018/2019 summer where temperatures in Melbourne reached 48deg c and Sydney 50deg c.

          What is going to happen, humans will be forced gravitate to smaller communities where it would be a bit cooler to exist.

          This is why NZ needs to start planning for 20 million people decentralised to smaller sustainable environmental friendly towns and cities, where SME businesses can provide goods/services and employment to provide economic growth for their community.

          Urban theorist like yourself need to start focusing on how communities are going to be planned to take in account a warming planet and the resulting climate change instead of planning for large dense cities.

        4. In the event we need to establish lots of smaller cities and towns, then research highlighting what people like about cities and towns might be quite useful!

          P.s. When you call me an “urban theorist”, you do yourself no favours. Play the ball not the man …

        5. Also, Kris as a general comment you seem to be focused on shifting growth from larger cities to smaller towns. Our research doesn’t have much to say about the optimal population distribution, at least not yet. That is, our findings seem equally valid in a future scenario where urban growth is distributed in a way that you would seem to prefer. For this reason, I think a lot of your comments are, respectfully, missing the point.

        6. Stu Donovan – Firstly, I am not happy with your comment – “When you call me an “urban theorist”, you do yourself no favours. Play the ball not the man …” Does this have an under lying meaning?

          Yes, you are an urban theorist as you are assuming that people will want to be living in large dense cities as the planet warms.

          With regards to your comment – ” Kris as a general comment you seem to be focused on shifting growth from larger cities to smaller towns. Our research doesn’t have much to say about the optimal population distribution, at least not yet. That is, our findings seem equally valid in a future scenario where urban growth is distributed in a way that you would seem to prefer. For this reason, I think a lot of your comments are, respectfully, missing the point.”

          I am not missing the point. Planet warming is going to have a major disruptive impact on how humans live, eat, travel, work etc. From NZ’s point of view, being a large island sparsely populated nation, that will have the ability produce its own food and be reasonably self efficient country that will be a target for ‘climate’ refugees that will see NZ as a ‘safe’ place to live.

          Unless you have a copy of on ‘How to survive planet warming’ instruction manual, its going to be a process of a lot of crystal ball gazing and process of trial and error.

          I think urban and transport planners should be looking at how to plan our urban centres for population and economic growth in an environmentally friendly way so all the country benefits not large dense cities.

        7. Here’s how someone I know in Cairns managed in the suburbs without driving: she would wear “crinkly cotton” clothes that she’d twist into a rope and fully wet, twist dry-ish, then put on before walking to the bus stop. By the time she got to her destination, she’d be dry.

          She found the suburban house really hot, despite the insulation, because all the heat came in the roof and the walls, so after 8 years, got air conditioning, just to turn on for an hour each afternoon.

          Now she’s in an apartment in the inner city and doesn’t need the air conditioning because less heat gets in, and she doesn’t need to wet the clothes before she goes out because distances are shorter to where she goes.

          Point is that a well-designed city, Kris, requires less energy and can be a more pleasant place to live than small towns are. There’s plenty of permaculture and sustainable development advice that we can use to retrofit our cities well.

  3. From an employee perspective, I always found the cities of higher population and greater density tended to pay more to offset the increased cost of living in such cities.

    It’s hard to believe that the reason someone gets paid less to work in Hamilton is because they have paid on-street parking nearby. Could this be more correlation than causation?

    1. Larger and denser cities have higher productivity due to agglomeration economies. This finding is supported by a large body of research, including our — especially for the high-skilled.

      That’s a somewhat different question from: Do wages in larger and denser cities offset higher costs? Most research actually finds they do not, which in turn implies that people’s disposable income tends to decline with urban growth. Does this then mean cities are *bad*? No, it means that larger and denser cities offer people additional benefits that aren’t reflected in wages. Things like social and cultural activities, for example.

      I’m not sure what your comment on Hamilton, paid parking, and correlation vis-a-vis causation is alluding to.

      The finding higher rents leads to lower wages arises from:
      — Higher rents reduces the profitability of firms
      — In a competitive environment, firms will respond by adjusting their production and in turn their consumption of inputs.
      — In our setting we find these adjustments reduce the quantity of floor space and labour demanded. That is, higher rents lead to less production and less demand for these two inputs.
      — Less demand for labour –> lower wages.

      1. You said -“Do wages in larger and denser cities offset higher costs? Most research actually finds they do not, which in turn implies that people’s disposable income tends to decline with urban growth. Does this then mean cities are *bad*? No, it means that larger and denser cities offer people additional benefits that aren’t reflected in wages. Things like social and cultural activities, for example.”

        If residents of a large dense city, do not have the disposable income due to the high costs of living in a large dense city, how do they benefit of social and cultural activities when they don’t have the time and/or money. Its the wealthy residents of a large dense city benefit of social and cultural activities at the expense of the working poor and struggling middle class.

        Theory is great but reality it hasn’t work just look a New York. etc or even Auckland.

        Theory

        1. “Its the wealthy residents of a large dense city benefit of social and cultural activities at the expense of the working poor and struggling middle class.”

          Everyone gets benefits from being in larger cities, a classic case of this would be school teachers and nurses. Generally they get paid almost the same no matter where they work however many of them prefer to work in Auckland because it offers so much.

          If you live in a small town you may only have 1 bar, but in Auckland there are hundreds if not thousands all with their own unique take. In a small city you may only have one movie theater meaning you have a limited choice of movies and times, in Auckland you can see almost any movie at almost any time. As a little kid there is only one Rainbows end and that’s in Auckland, we also likely have more hydroslides than any other city. Auckland also has significantly more beaches than Hamilton, much better surf and Christchurch and better rubbish collection than Napier.

          It all comes down to what you value.

        2. That’s correct, real wages tend to decline as cities grow.

          For people to stay put in those places, then they must receive a compensating benefit that offsets the loss in real wages. Evidence (like analysis of actual data, not just reckons) suggests the compensating benefits are often in the form of consumer amenities (e.g. more diverse goods and services), cultural activities (e.g. libraries orchestras etc), and social connections (e.g. romantic relationships – yes it’s true!).

          You point to New York and Auckland as if they’re failures, which is odd. Many millions of people live in those cities, so they must be doing something right, otherwise people would leave. Can they do better? Absolutely, which is what this post is about.

      2. “I’m not sure what your comment on Hamilton, paid parking, and correlation vis-a-vis causation is alluding to.”

        This was in relation to your statement “parking requirements, don’t just push up the costs of development but they also suppress wages.”

        I’d suspect that if you took a copy of city of Hamilton, and then converted all the on-street park to grass berms that wages in that city wouldn’t suddenly go up by 20-30%.

        Without knowing anything factual on the topic, I would suspect its more a fact that cities that are large, tend to be denser in the CBD. As high wealth jobs tend to love being in CBDs, and the bigger and denser the CBD the better in their regard. It naturally means these high wealth jobs move to places that happen to be so expensive providing parking is a very hard challenge.

        The fact more of the top 1% are in Auckland than Gore is not due to their being too much parking in Gore, but rather these 1%ers like to be with other 1%ers. This is why many move from Auckland to Sydney and then Sydney to London.

        1. Nope, still confused.

          The post doesn’t mention on-street parking or paid parking at all. I mention “parking requirements”, which are planning policies that require developments to provide *off-street* parking. The point is that off-street parking requirements push up costs of development –> higher rents which–according to our results–suppress wages.

          And the relevant comparison is not differences between cities like Auckland and Gore. Instead, the relevant comparison is between urban rents in Auckland *with or without* parking requirements. In the latter situation, rents in Auckland would be lower, leading to–if you believe our results–lower housing costs and higher wages.

          So basically:
          (1) supply/price of on-street parking is an irrelevant rabbit hole; and
          (2) focus on the effect of regulations on rents holding city constant.

        2. I always thought the provision on on-street parking did come from regulations. It may very well be a public realm asset, however it uses space that could be used for other things such as grass berms.

          In terms of off-street parking. Based on the assertion; if we have two identical companies in two identical buildings, if one of these buildings also has a paid parking building attached to it we would expect the company in the building with the attached carpark building (that they may not even use) to pay their staff less than those in the building that isn’t attached to a carpark building?

          This is an assertion that I don’t really believe. Certainly if the company provided free parking to staff then this would likely be factored into their salary. However I think there are a great many other factors that influence incomes and the absence of parking regulations is likely a result of these factors and not the factor itself.

          It’s like saying wearing hats makes it sunny because based on the statistics the amount of sunlight is directly linked to the number of hats being worn.

        3. Again, I think you’re going down too far down the parking rabbit hole and missing the key point.

          That is, higher rents reduce wages. Why? Well, the logical chain of reasoning is simply:

          higher rents –> less output –> less demand for labour –> lower wages.

          In terms of off-street parking requirements, there’s evidence they increase the costs of development and reduce the supply of floor space –> higher rents. That these regulations exist and that they serve to increase the costs of floor space is all that matters here (NB: Regulations may, of course, have other benefits but let’s leave that aside for now).

          Parking requirements are just an example. If you don’t like them, then find another regulation more to your taste, e.g. height limits or heritage controls etc. Again, all that matters is that these regulations increase rents, presumably by reducing the supply of floor space.

          Finally, your example is again not right. You need to consider two cities that differ in only one respect: Rents. Our result suggests the city with lower rents will have higher output, increased demand for labour, and higher wages.

        4. “two cities that differ in only one respect”

          I agree that this would be the best way to do things, however looking at the charts you have above it seems you haven’t done this yourself. I’d imagine it must be next to impossible to find two identical cities that only differ by a single aspect.

          If find this a little strange.

          higher rents –> less output –> less demand for labour –> lower wages.

          I always thought

          higher rents -> greater efficiency -> higher value products -> higher skilled workforce -> higher wages.

          This certainly seems the way cities work and hence why you don’t find cotton fields in the CBD.

        5. Richard, the on street parking does not need to be replaced by grass berms but with bus lanes which ill increase the availability and reliability of transport options

        6. Responses below indicated by ***

          Comment #1: “two cities that differ in only one respect”

          You say: I agree that this would be the best way to do things, however looking at the charts you have above it seems you haven’t done this yourself. I’d imagine it must be next to impossible to find two identical cities that only differ by a single aspect.

          *** The charts are from another study, as noted in the post. AS for our results, we track cities over time. Using our model, we can then analyse how changes in rents affect changes in wages in the same city. Basically, we get as close to the ideal city-city comparison as one possibly can when using real-world data. And in cities where rents increase over time, we find that wages decline–holding other factors constant, e.g. we control separately for productivity, which leads onto the second comment …

          Comment #2:

          You say: If find this a little strange.

          higher rents –> less output –> less demand for labour –> lower wages.

          I always thought

          higher rents -> greater efficiency -> higher value products -> higher skilled workforce -> higher wages.

          This certainly seems the way cities work and hence why you don’t find cotton fields in the CBD.

          *** I think you’re conflating two issues. It is true that high rents are an indicator of productivity. That is not equivalent to higher rents leading to higher productivity. Basically, you’re mixing correlation and causation. Put another way, the positive correlation between rents and productivity does not imply policies that increase rents will necessarily increase productivity.

          Policies that increase productivity will increase productivity and, to some extent, manifest in higher rents and higher wages.

          Second, this does not imply that policies

        7. I think I see what you’re getting at Stu.

          Does any of your data show that the introduction of height restrictions resulted in a reduction in productivity? Or the the removal of parking provisions resulted in higher wages?

  4. “Higher rents lead to lower wages” – Does that means lower disposable income after rent, or actually lower gross wage?

    If it is the latter, this will be a very interesting founding.
    Are there any explanation for this phenomenon?

    1. — Higher rents reduce (1) the optimal level of production and (2) the demand for floor space
      — Reduced production flows through to reduced demand for inputs. In our model, labour is one such input.
      — Reduced demand for labour leads to lower wages.

      In our case, we have data on after-tax wages paid, so not “diposable income”.

    1. sadly, no, Brendon, not on this trip.

      We’re spending two-weeks in Auckland and Coromandel for my Mum’s 65th birthday.

      I’d love to visit CHC again and are currently exploring opportunities for that to happen. Will let you know!

  5. Stu, I had a look at the Glaiser research, thanks. And wondered:

    Do you know if researchers are looking at combinations of urban factors that maximise the consumption of cultural/social amenity _and_ minimise the consumption of materialistic goods?

    Also, correlations with “growth” – is anyone now correlating with other measures of economic health than GDP?

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