Agglomeration effects and housing market dynamics

Abstract

This project aims to quantify productivity-related agglomeration benefits arising from the concentration of employment in Australia. Agglomeration of firms and employment reduces the impact of distance on the exchange of goods and services, skills and people, and ideas and information. Concentration of firms and employment can thus lead to spatial variation in productivity. Our measure of productivity is individual wages. We control for individual and firm-specific characteristics. Agglomeration benefits are examined across the wage distribution, as well as before and after adjusting for basic housing costs (mortgages and rents). Our key agglomeration measure is concentration of employment (or employment density). We also include employment in nearby locations, urbanisation economies and localisation economies. • Our estimates suggest that a doubling of employment density raises hourly wages by 1 to 4 per cent. While agglomeration has a positive effect, individual and firm characteristics are the key determinants of spatial variation in wages. • Localisation (industry specialisation) and urbanisation (diversity of industry) economies also generate agglomeration effects and will be critical to the evaluation of population and employment dispersal strategies and aims. Broadly a doubling of economic specialisation, relative to the state as a whole, is associated with a further 4-10 per cent higher hourly wage level. • Analysis of agglomeration benefits across the wage distribution reveals considerable variation. Lower-wage earners benefit less from agglomeration than higher-wage earners. • The wage premium typically remains also after adjusting for basic housing costs (mortgages and rents). However, agglomeration benefits are substantively capitalised in housing costs for the lowest 20 per cent of earners. The net benefit for middle-income earners also appears less than for higher-income earners. • Housing markets potentially exacerbate inequality by distributing gains from agglomeration from lower-wage earners to property owners- although the total effect is likely mitigated by transfer payments and rent assistance. • Housing market policies that reduce this distributive role may have additional productivity-enhancing effects by incentivising investment in productive capital, new technology and infrastructure. • The results in this report highlight the role that housing markets and affordability play in distributing gains from agglomeration. The implication for urban transitions is that housing policy and affordability are key to harnessing agglomeration benefits at the societal level.