Its not the shovels that count: its what they're shovelling

Is boosting infrastructure the best road to economic recovery for New Zealand?

If we do not get investment for recovery right we will undermine productivity and economic progress for generations to come. Indiscriminate infrastructure development at this time risks limiting options by absorbing and concentrating resources in an area in which performance has been demonstrably deficient.

New Zealand's recovery from Covid19 requires short-term job gains and long-term income growth if we are to throw off the shackles of public debt. Committing substantial resources to “shovel-ready” projects without rigorous assessment risks excessive spending to meet uncertain demand. The result of over-investment will be lower foreign reserves, a diminished credit rating, and a prolonged productivity deficit.

Get the economics right first

Economic justification is essential to establish whether the benefits generated by infrastructure justify the resources consumed in its development. Projects that do not stack up have a negative fiscal impact, requiring ongoing tax- or rate-payer subsidy. While otherwise uneconomic projects may provide non-market benefits (to the environment, social equity, or public health for example), if we do not first consider their economic efficiency, we cannot know whether they are the best means of achieving those benefits. 

We do know, however, that the wrong projects can set our economy back: the Think Big projects contributed substantially to a run on foreign exchange reserves in the early 1980s.

Current failures

The damage from uneconomic projects tends to increase if they are large scale. The literature on cost blowouts for major infrastructure projects – especially in transport – is extensive. Auckland's Central Rail Link , for which the case was flawed from the outset, and Transmission Gully are text book cases.  Consider the following:

• Under-specification at the outset, with inadequate technical assessment or design myopia leading to re-specification and add-on costs in the course of development;
• Under-costing from relying on precedent and current (or historical) costs for estimation, failure to consider the effect of competing demand for resources, and the optimism-bias of project protagonists leading to unwarranted approvals and subsequent cost blow-outs;
• Contract failures from accepting low tenders and engaging at-risk contractors to meet tight project budgets, leading to higher costs when contractors fail and re-tendering is necessary;
• Project delays from under-specification and under-costing compounded by resource shortages (including labour and skills), tying up capital and delaying benefits.

The failures threatening the CRL are such that economist Tim Hazeldine’s view is that it is time to stop pouring good money after bad. The contingencies facing such large scale projects should double down the call for rationality in today’s perilous economic environment. 

Unproven Demand

Because large-scale investments take time to finish, demand at completion may be quite different from what was projected at inception. Along with the impact of unexpected disruptions, extended pay-back periods add to uncertainty over what demand a project may eventually have to meet. 

As of today, the Infrastructure Commission’s pipeline of major public capital works , although incomplete, outlines around $16b or more of spending. Approximately 60% of this is for transport. (These figures are based on the cost ranges provided).  Yet major transport projects today face substantial shifts in demand, such as:

• Revised working conditions lowering building occupancy and increasing the appeal of large footplate, low-rise, suburban workspaces with natural light and airflow;
• Changed working arrangements (staggered hours, home-based working);
• Newly suppressed demand for and lower passenger densities on public transport;
• An increased preference for medium/low density suburban living environments;
• A shift from large scale venue-based recreation;
• Reduced international travel and tourism;
• Reduced demand for mall-based retailing in favour of local services and centres;
• More on-line retailing and in-home services.

We can add to this market uncertainty the impact of changing technologies, including prospects for:

• Enhanced face-to-face telecommunications;
• Gains in vehicle autonomy increasing capacity on existing highways;
• Falling electric vehicle costs boosting private transport and demand-responsive public transport;
• Aircraft operations favouring smaller aircraft on point-to-point rather than hub-and-spoke networks;
• Continuing logistics gains integrating production and distribution with direct delivery;
• Artificial Intelligence, product printing, design refinement, innovation, and changing consumption preferences jointly supporting local production of specialised goods;
• Distributed specialist services (law, health, medicine) supported by AI, gains in computing power, seamless tele-conferencing, and advanced instrumentation;
• Decentralised settlement with modern, localised infrastructure, decentralised employment, and efficient inter-regional and international information and transport connections.

A Shortage of Resources

Supply chains are over-stretched in the development sector.  This flows through to delays, costs, and failures all-too-often overlooked by local politicians and their consultants in the haste to justify economically suspect projects. 

Shovel-ready projects track straight into this quagmire of unrealistic supply chain and labour market expectations.  Yet, Infrastructure New Zealand has effectively lobbied the civil engineering/development complex to the top of the national economic agenda. It is supported by a network of professional players (engineering, consulting, planning, design, and legal) and the vested interests of operators. Because of its visibility, infrastructure building also plays to political monumentalism. 

What are the alternatives?

A shovel ready recovery locks us into projects based on the economy and labour market of the past. Uneconomic or marginally economic projects limit our ability to do other things. It would be better to focus on initiatives that lift adaptability (the ability to change what we are doing), and flexibility (the ability to vary how we are doing it). 

Here are some ideas that might contribute: 

• Vet and prioritise infrastructure projects, ditching those like Auckland light rail plans with costs bound to blow out and which face uncertain demand; 
• Pursue best practice in the assessment, design, specification, and management of any projects that may be justified (most likely in public health, water quality, and the like); 
• Prioritise social infrastructure (education, health, and housing) for  short- and long-term benefits. 
• Promote innovation and entrepreneurship with vocational education to increase career mobility and deepen domestic skills and experience. 
• Pursue an open business environment to facilitate enterprise, mobilise capital, ensure productive resources and feedstocks can be widely accessed, and streamline regulation; 
• Address business support to future-oriented capacities, rather than propping up existing structures and practices; 
• Review approaches to trade facilitation, support for innovation and technology, and business taxation. 
• Maintain household incomes: increasing local consumer spending, especially among low income households, will have the highest immediate impacts on employment while providing breathing space as the country and the world adjust to the economic shock of Covid 19.

Quite simply, an infrastructure-dominated programme that imposes new and potentially open-ended fiscal demands on currently constrained incomes is more likely to undermine than boost economic activity.

Can we do Bigger Better? Firm Size and the Quest for Productivity

Big enough to prosper

Look at this from the Economist:

Britons and Americans are used to lionisations of the small businessman. This praise is often misplaced; it is not so much small firms that drive growth and job creation so much as small and young firms on their way to becoming much larger. Where small firms are most common, as around Europe's southern periphery, their prevalence is sign of uncompetitive markets and low productivity.

The Economist suggests that the key to productivity is letting companies grow, because bigger companies deploy capital and labour more effectively.  We might add, from our remote New Zealand perspective, that size also gives firms the ability to work offshore markets, expanding beyond a constrained  domestic market.  

In this way, size begets size.  And big firms provide the seed bed for innovation (as I argued in Growing a productive urban economy) creating a virtuous cycle - at least up to a point. (For very large organisations there often comes a time when management diseconomies reverse efficiency gains).

What Role SMEs?

In New Zealand we extol the small and medium enterprise sector (SME) when maybe we should be doing what we can to get SMEs to bust out and grow.  And it’s fashionable to argue that if more were to locate within Auckland– our primary city - businesses could reap external economies of scale (so-called agglomeration economies), accessing more labour, more skills, and more services.   

But it’s more fundamental than that.  Rather than promoting lots of small business units sharing services and competing in a crowded labour market we really need to do what we can to ensure that more are actually growing.

The Size of New Zealand Business Units

The rest of this post looks at the size distribution of New Zealand business units using Statistics New Zealand February 2011 data. It then looks for evidence that location in Auckland might favour manufacturing by favouring bigger firms. 

The statistics tell us that 65% of New Zealand’ Geographic Business Units didn’t employ anyone.  (A GBU is defined by Statistics New Zealand as “a separate operating unit engaged in New Zealand in, or predominately one, kind of economic activity from a single physical location or base.) Let’s set them aside.

So what about the other 35%?  Well, the bad news is that New Zealand’s business units are underwhelmingly small.  63% of them provide 5 or fewer jobs, 78% fewer than ten! 

Looking at the other end of the spectrum, of 175,150 GBUs only 2,425 (1.4%) employed more than 100 people, and another 3,540 employed between 50 and 100 (2.0%).  Between them, though, these bigger units provided 44% of the country’s jobs.

The Analysis

I looked at the size distribution of business units for two “regions” – Auckland (New Zealand’s only city of over 1 million people) and the rest.  Auckland accounts for 29% of the country’s business units and 33% of its employment. 

I plotted the share of GBUs and employees across six size categories for Auckland and the rest of New Zealand.  The share of  business units in a given size category is plotted in the first two bars and the share of employment in the second two for each of the six size categories.  And in each case the share of the country’s units or employment outside Auckland (Rest of New Zealand) is plotted first ( in blue), to the left of the share inside Auckland (in red). 

So what does the data tell; us?  Business units in Auckland tend to be slightly larger. Even though over 75% still employ fewer than ten people (compared with 78% elsewhere) there is a marginal bias towards larger organisations, with 35% of Auckland jobs in units employing over 100 people compared with 31% for the rest of New Zealand.

This is consistent with the propensity of businesses in a dominant city to be larger, given a labour resource that can support greater expansion and a larger local market.

Digging Deeper

This exercise has been repeated for manufacturing, and within manufacturing for the dominant food processing sector (67,850 employees nationally) and for the next three sectors, equipment and machinery manufacturing (26,060 employees), metal products (21,650), and wood products (15,970). The charts appear at the end of this post.

Manufacturing

In manufacturing the picture changes.  The rest of New Zealand category has a greater proportion of both small and large enterprises than Auckland.  Consequently, only 32% of Auckland’s manufacturing employees are in firms with over 100 employees, compared with 42% elsewhere in the country.

Apparently the benefits of urban scale do not translate into larger manufacturing enterprises, at least at this level of generalisation.  This  raises doubts over the productivity of firms in the city,  and is consistent with my earlier evidence that concentration of a sector in  Auckland does not necessarily favour its growth .

Food Manufacturing

This anomaly is explained in part by the nature of the food products sector, which accounts for 36% of all manufacturing employment in New Zealand.  It is dominated by large dairy and meat processing works in rural areas, small towns, or provincial cities.  The nature of these long-standing and globally competitive primary processing activities mean that efficiencies accrue outside major urban centres in factories that tend to be labour, land, and capital intensive. 

Wood Products

Wood product manufacturing is much the same.  The 21% of New Zealand’s units located within Auckland tend towards medium size (10-50 employees).  Elsewhere in the country 27% of units of employ over 100 people.

So scale, expertise, and a commitment to exporting in primary processing mean that productivity in manufacturing may be healthiest outside  Auckland.  It is also reflected in a heavy commitment to exporting from  secondary centres.  Despite concerns that New Zealand food and wood processing do not produce a lot by way of highly transformed, high value products, sustaining and promoting their scale outside the main urban areas has been critical to their continued competitiveness.

Certainly Auckland (and Christchurch) plays an important role in these  industries, first through housing  higher order or specialised services they might draw on, including logistics, finance, legal services, and research; and, second, as a  location for smaller spin-off firms that undertake more specialised manufacturing and marketing using primary products as their raw materials.

The urban manufacturers

What about sectors that entail a greater degree of product transformation? Metal product and machinery manufacturing fit this description and are, by contrast with primary processing, urban activities.  In New Zealand, though, they are modest both in scale and performance. With a small number of notable exceptions there are few units capable of competing internationally.

Metal product manufacturing tends to take place mainly in medium-sized units, from 10 to 100 employees, particularly in Auckland, which dominates the sector.

The manufacture machinery and equipment has a higher proportion of very small units, and more employees in the small number of large units.  Again, Auckland accounts for a disproportionate share of national business units and employment.

The size distribution of units in these sectors, then, may be tied to the  scale of the  markets they are located  in – making them relatively poor prospects for productivity-driven international sales.  Their capacity to move beyond small scale is most likely limited.

So what does it mean?

If scale is a condition of productivity (and exporting), New Zealand industry faces a major disadvantage.  That’s hardly news.  So far, it has not achieved a lot by way of global performance outside primary processing sectors where scale and accumulated expertise build on a natural production advantage.  That’s not new, either. 

Making the point that in New Zealand size, innovation, and productivity happen outside Auckland is an important reminder, though, that much as we might want to pursue planning and policy fads based around urban agglomeration and density, that’s unlikely to offset our intrinsic disadvantages of small scale and remoteness. 

So what can we do?
According to the World Bank rankings New Zealand is already third in the world for ease of doing business.  Perhaps the answer is to ensure that it is also easy to grow a business here. 

Among other things, a policy fixation which promotes places as the fonts of productivity and innovation – and Auckland as the solution to boosting New Zealand’s economic standing -- may have to change.  The reality is that productivity is associated with organisations –  large and growing organisations, and their capacity to engage in networks ("production and distribution chains") of growing businesses.

The challenge for urban policy makers is to ensure that local conditions, the rules, regulations, and charges  affecting firms, and  the quality and availability of land, labour and capital  do not impede local investment and growth.  How this might be done should  be central to the Auckland Spatial Plan.  I see little evidence that it is.

 

 

Bused or Bust?

Making connections

Did anyone notice a couple of linked stories in the New Zealand Herald on Monday 28^th March, one about Auckland City’s ballooning indebtedness, including a discussion about how to fund the new underground rail loop, and the other about changes in inner city bus circuits?   And later in the week Brian Rudman was calling for an increase in bus capacity as the Auckland public embraced the “transport revolution”.

And did anyone realise just how precarious New Zealand’s economic situation is right at the moment?  Right when it looks like falling house prices and a lift in savings might begin to trim back private debt, the disaster of Christchurch is beginning to blow out public debt, already under pressure from the Government’s stimulus programme, tax cuts, and a lower than expected tax take because of falling profits. 

Well, these things are connected in a fairly simple way. 

Prices not plans are doing the trick for public transport

First, the anti-auto lobby are getting their way but, ironically, it is not their plans that are delivering the switch to public transport.  The long-term vision about reshaping the city to deliver passengers to support the aim of developing a mass  transit system is not doing it.  No, it is the simple mechanism of price.  I am not a huge believer in the efficiency of markets, but the increasing cost of fossil fuels is suddenly putting people on buses.  And for those who cared to read the research and use a little common sense, that is hardly surprising.

Time for incremental investment in proven public transport

Second, how can we respond most readily when the market for public transport suddenly jumps?  Why, add more capacity.  In the case of buses it is relatively easy to do this through incremental investment in new rolling stock and more intensive use of the existing fleet.  The roads are there and, with luck, they will cope with more buses, especially if there are fewer private motorists on them. 

Fortunately, roads are a long-term investment in multi-purpose fixed infrastructure that can be readily turned to public transport.  They do have capacity constraints, so it is important that they are well planned.  If, as I suspect, we are faced with long-term increases in real fuel prices, they may need tweaking here and there to facilitate the flow of buses.  But, as the Herald story indicated, the rolling stock is flexible.  It can be easily re-routed to where demand is, can serve a wide range of cross-city destinations, and are not subject to widespread disruption when one part of the system suffers a failure.   Not only that, but there is a reasonable incentive for the private sector to bear a decent share of the costs.

Going off the rails

Now, compare that with rail.  Here we have highly expensive, fixed routes that serve a limited number of destinations.  How do we get people to them?  For all but those relatively few that live within 400 or 500 metres of the railway station, the answer is bus or car.  So we need decent, large parking facilities close to those stations.  But hang on, we also need quality urban redevelopment around them to justify the stations in the first place (and that will need its own parking capacity).  Now the public purse has to be stretched not simply to build and electrify the tracks – so that they can go underground  – but also to promote the transit centres planned to sit around the stations.

And then, or course, there is the capacity of rolling stock.  It is expensive.  It is a lot less flexible than buses.  And there is a limit to how much capacity can be loaded onto the system.  And any failure within the rail network will have further-reaching and generally more prolonged effects than generally occurs with disruption to a bus service.

With buses, the capital outlay is less per unit and the opportunity to take advantage of gains in engine efficiency over time is greater.  As innovations in vehicle technology and passenger comfort and convenience are introduced, so it is easy to progressively convert a fleet to take advantage of them.  If a revolution happens in economical smart cars or engine technology that see everyone revert to private transport, the bus fleet can be reduced in an orderly fashion and the value of investment in the roads is not undermined. 

Plugging public transport

I’m not against public transport.  I’m not even against the enthusiasm to base some of it on rail – as long as it does not involve too big an outlay on new lines, tunnels and the like.  (Actually, I am still a fan of rail as a potential long-distance freight system, one that we may need to ramp up in New Zealand if fuel prices do keep rising). 

I don’t even mind subsidising ferries so that the Waiheke set can get themselves into the CBD for work, shopping, and entertainment, and tourists can head out to the vineyards in the Gulf. 

But there are limits to what Auckland – and New Zealand -- can afford.  And it seems to me we might just be approaching those limits.  Every piece of infrastructure today has to really work hard to justify the investment.  And every dollar of subsidy poured into public transport has to have a real effect on reducing the external costs associated with increasingly concentrated urbanisation.  (It would be nice, too, if it was to help most in areas where people are most "transport disadvantaged").

We are facing an economically challenged and fiscally constrained future, and the prospect of a real  decline in our standards of living.  So it makes no sense to be over-investing in or unduly propping up public infrastructure which has limited capacity, cannot go close to meeting its capital costs, is largely inflexible, and has little redundancy in the case of breakdown or disruption. 

Getting our priorities sorted

Having enjoyed transit systems -- bus, rail, and ferry - while living in much larger cities than Auckland, I am a fan.  But today reality has to rule at home .  We are in for long-term rises in the price of fossil fuels.  We have a relatively decentralised population and decentralised employment in a city of modest scale.  We have fiscal challenges.  We have a host of priorities to sort out for the city (and the nation). 

Just because we now have just one council does not mean that the bucket is bigger (and with the costs of amalgamation hovering over us, it may have got just a little smaller). In theory, a single city can make the harder decisions about spending in the region - including what not to spend - that much easier than the eight cities that preceded it.  (The reality might just be that a bigger city makes bigger mistakes in the way it allocates its resources!) 

More than that, there are major priorities competing for funds nationally.  Auckland cannot expect too many top-ups from central government.  There can be no argument that our most pressing challenge as a nation is rebuilding Christchurch.  And in that context it behoves Aucklanders to make even more responsible decisions about spending, decisions that increase the productivity of current and future investment, rather than diminish it. 

So let’s do some real planning – work through our resources and our needs, determine some priorities, and think about keeping our city flexible and sustainable.  If that means providing for public transport, it also means making sure we do not go bust trying.  Let’s plan for buses.  We already have the roads.

Are we being a bit dense about productivity?

Taking the long view

There has been a lot written about the virtues of a high density city and a thriving CBD.  I have no issues with either of these notions, but let’s at least understand the dynamics before we concoct policy to try to bring them about. 

High density does not necessarily mean a city is more productive, or wealthier, or more sustainable.  It just means more people live or work in a smaller spaces.  This may be because of a land shortage - think Japan and its cities.  (I hope this is not what planners have in mind for Auckland).  Traditionally, high density living is associated with less wealth, lesser lifestyles, and public health challenges. 

The long view of the west since the Middle Ages has been one of increasing real wealth and falling densities.  Especially since the 18^th century greater personal mobility and enhanced material standards have been implicated in healthier, longer lives and greater social equity. 

Much as I rail against conservative planners, reversing this trend is something we should be wary about, especially when crowded cities are associated with social disparity and ageing urban infrastructure with greater risk of disruption.

The transport tail wagging the density dog

Yet today’s planners and policy-makers not only try to restrict development to increase densities, but also promote transport investments in the belief that they will make it happen. 

Instead of designing a public transport system that might serve our particular form of settlement in Auckland, we are designing one which is intended to change the shape of the city.  The New Zealand Herald (3 December 2010) quotes transport expert from the University of Sydney, David Hensher, as “absolutely amazed” that we would even consider rail given Auckland’s relatively low density.  It would be far more cost effective, he thinks, working on extending our busways.  At least that way we could get public transport to where people want to live and work and we could keep it flexible to meet changing needs.

Of course, one of the interesting things about rail-based public transport is that if it works it encourages long-distance commuting, and lower densities.  This, in turn, increases the distances travelled for non-work purposes. 

And then the transfer of travellers from private to public transport increases capacity on key roads, encouraging additional travel and promoting further suburban and exurban growth.  That’s why sweeping statements that “transport investments serve to facilitate higher densities” [1] have to be taken with a grain of salt. 

The density myths

I want to challenge what I see as some of the myths about city density.  I want to deal in this blog with the proposition that actively increasing density improves aggregate (or individual) productivity.  There are a couple of myths that I will tackle subsequently.  One is that increasing density will increase the health of the urban economy.  The other is that to save the city we must preserve the CBD. 

The productivity story

I have already queried the role of city size and density in urban growth in earlier blogs, mainly because it hasn’t apparently helped Auckland over the past decade.  Being concentrated in the region is more likely to be a disadvantage than an advantage to business. 

Despite this, the policy argument goes along these lines:

·         Large cities grow faster than small cities;

·         The higher densities associated with larger cities foster higher productivity (value added per worker);

·         Therefore if we force higher employment densities by regulating land use we will boost productivity and cause the economy to grow;

·         We can also increase employment densities in certain parts of the city by delivering public transport commuters to them;

·         These transport nodes will become fast growth areas and this growth can be attributed to  both public transport investment and consequent higher employment densities.

This reasoning supports policies to: (1) limit land availability for business and the view that business would be better off redeveloping “brownfield” sites or intensifying on existing sites because that will improve productivity;  (2) subsidise otherwise uneconomic public transport.

The evidence – marginal at best

Those are big – and potentially very costly – policy calls.  Just how much confidence can we have in them?  What does the supporting analysis say?

In New Zealand we relied for some time on overseas analyses, but since the mid 2000s we have developed a local evidence base using econometric research.  David Maré’s 2008 study is the most widely cited, and suggested a substantial productivity “premium” accruing to Auckland and, within the region, the CBD.  [2] This work has been called on, for example, to support the recent business case for an underground rail loop in Auckland.[3]  But just how robust is it for policy purposes?   

At best the evidence is weak with respect to the possibility that higher densities bring about higher productivity.  At worst, while the analyses may be technically correct, the policy assumptions that follow may be plain wrong.

The complication of composition

The growth of a national, regional, or urban economy over time naturally leads to a “sorting” of businesses.  This “composition” effect means that some places have businesses within them – for all sorts of historical reasons – that produce higher value goods or services than other places.  The composition effect based simply on classifying firms to sectors explains half of the apparent productivity premium identified by Maré. 

Even this may be conservative, though.  The two digit classification of firms he used still hides considerable diversity among firms in the same sector.  These differences are likely to explain a lot more than areferring simply to the generalised sector each belongs to. 

Maré also estimated the relationship between density and productivity in Auckland. His analysis siggested that 10% higher density is associated with 0.86% higher productivity.  This is not a huge gain when we consider what might be entailed by way of public spending and regulation to bring about a 10% increase in density.  There have got to be easier ways to increase productivity.

In any case, is this really a cause and effect relationship?  Maré's estimate came from a static analysis.  Establishing a dynamic relationship, such that when one item changes another follows, is more difficult.  Maré could not estimate a “robust” positive relationship over time, and called for more work to be done. Even if he could have demonstrated a dynamic relationship, we are still stuck with chicken or egg ambiguity – does higher productivity in fact lead to higher densities?

It gets shakier

Maré and Daniel Grahams' subsequent work for NZTA is even more circumspect.  Based on comparisons across New Zealand regions, it suggested that firms at locations with 10% higher density are 1.7% more productive.  But firms in different regions tend to do different things.  Observable differences based on 15 categories to allow for industry mix actually accounted for 70% of the density “premium”, dropping the productivity gain aacross a 10% density increment rom 1.7% to 0.5%.  (Incidentally, the figure for Auckland is down from 0.86% to 0.76% in this analysis).

Making sure we are doing the right things in the region is far better, I would have thought, than increasing densities and hoping this makes companies stronger.  The harder it becomes it invest in new activity, the more likely we are to be locked into yesterday's industries.

Oops - maybe Auckland is the wrong place

Maré and Graham explored different ways of estimating productivity effects, allowing for differences among enterprises and for sector mix within regions.  I drew the following conclusions from their analysis – although I concede some of the subtleties eluded me:

(1)    The predominant impact on the productivity-densities relationship is sector mix in a region;

(2)    Within Auckland, the stronger relationships and therefore the purported potential for gains from increasing employment densities are associated with the predominantly rural, low density areas of Rodney and Franklin, followed by Manukau, not the old Auckland city;

(3)    There are diminishing returns to agglomeration: productivity gains associated with density are higher in low density areas and lower in high density areas;

The results suggest that we might better concentrate on connecting and intensifying development in areas of relatively low density rather than trying to shoehorn more into areas that are already relatively dense.  When we take into account the relative costs – public and private – of trying to lift already high density localities this makes even more sense. 

Perhaps we need to revisit the notion I advanced to the Metropolitan Auckland in 2006 - let's lift our sights and consider the economic potential of the northern North Island, and begin to think about connectivity and opportunity on a wider canvas.

And shakier

The evidence regarding “productivity premia” in some places rather than others appears just too weak to support land use policies designed to enforce higher densities or to justify lifting urban densities as a rationale for transport investment.   

Daniel Graham is quite explicit on this matter in subsequent studies:

A key conclusion is that we are unable to distinguish agglomeration effects from other potential explanations for productivity increases, most notably functional heterogeneity.  Consequently, the agglomeration effects of transport investments cannot be interpreted causally.  [4]

Digging into heterogeneity – the occupational dimension

Heterogeneity- - a fancy word for diversity – almost inevitably overwhelms any econometric attempt to measure a relationship as weak as that between density and productivity.  The analysts try to control for the sector a firm is in, but that still hides a whole heap of heterogeneity.

Sectors are not the only things that vary between places.  Occupational mix is critical, for example.  The 2006 New Zealand Census showed that 19% of employment in Auckland region fell into the category “Legislators, Administrators, and Managers” compared with only 14% in the rest of New Zealand and 21% in the CBD.  Another high value category, Professionals, made up 18% of Auckland’s employees, 25% in the CBD, but only 15% in the rest of New Zealand.  Similarly, Technicians and Associate Professionals made up 19% of employees in the CBD, 15% in the region, but only 12% in the rest of New Zealand.

Jointly these high value added occupations make up 66% of Auckland’s CBD workforce, 50% across the rest of the region, and 42% across the remainder of New Zealand.  Such pronounced labour market stratification will account for differences in value added per worker even within firms and sectors.

Conclusion –make it easier to do business to make Auckland grow

Quite simply, the higher order, management, control, and negotiation jobs tend to end up in big centres.  This facilitates a range of local, national, and international transactions that they are associated with.  The challenge for planners is to make it easier, though, and not harder for them to locate in the region.  Imposing congestion and over-the-top infrastructure costs associated with promoting a high density city might just have the opposite effect, discouraging local investment and employment.

The benefits that firms might be looking for by heading to the principal commercial centre in a region or nation can be delivered by the quality of transport and communication links for the conduct of business, and the quality and cost of living to sustain a healthy labour market.  But if we make it too hard for them to locate at a suitable site in Auckland – whether or not that is in the CBD – the continuous improvements in transport, mobility and communications that we are witnessing today might just make it easier for them to leave or bypass the region.

[1]  Maré D and Graham D (2010) Agglomeration elasticities in New Zealand, NZ Transport Agency Report 376

[2]               Maré D (2008) Labour productivity in Auckland firms Motu Research Paper 8-12

[3]               APB&B (November 2010) Business Case Auckland CBD Rail Link for KiwiRail and ARTA

[4]               Graham DJ and Ven Dender K (2009) Estimating the agglomeration benefits of transport investment: Some tests for stability Discussion Paper 2009-32, Joint Transport Research Centre, OECD

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