Relatedness, complexity and local growth

Abstract

We derive a measure of the relatedness between economic activities based on weighted correlations of local employment shares. Our approach recognizes variation in the extent of local specialization and adjusts for differences in data quality between cities. We use our measure to estimate activity and city complexity, and examine the contribution of relatedness and complexity to urban employment growth in New Zealand. Relatedness and complexity are complementary in promoting employment growth in New Zealand’s largest cities, but do not contribute to employment growth in its smaller cities.