It is commonly believed that bigger cities are more economically efficient than smaller cities. Economies of agglomeration imply that as more firms in related industries cluster together, their costs of production decline significantly, because of improved access to labour and supporting services, knowledge spillovers between firms, and the creation of a local market. However, increased agglomeration might also lead to traffic congestion, housing unaffordability, and other negative externalities that cause diseconomies to set in. The tension between agglomeration economies and diseconomies serves as a useful basis for understanding the growth and decline of urban regions.

National and state governments in Australia have sometimes adopted the view that significant positive agglomerations will grow biggest cities even bigger and any diseconomies of agglomeration can potentially be offset through improved planning and management of urban infrastructure systems. As a result, Australia’s long-term population growth strategy has prioritized major state capitals as the centres of greatest growth. Between 2017 and 2056, the Australian population is projected to increase by 11.3 million people, and approximately 75 per cent of this growth is expected to occur in Australia’s four biggest cities – Sydney, Melbourne, Brisbane and Perth.

This project assesses the economic impacts of a more decentralized population growth strategy that prioritizes greater regional growth in and around each of these four metropolitan regions. As part of this assessment, we analyse the high-level relationship between a city’s population size and its performance across different economic, and social and quality of life indicators. In particular, we examine measures of income, capital investment, employment, housing affordability and transportation costs. For each of the four metropolitan regions and surrounding regional centres, we compare predictions for these measures across different population growth scenarios. We are interested in understanding the positive and negative effects of agglomeration across each of these indicators. Are there clear points of inflection where agglomeration economies peak, and beyond which diminishing returns to population size set in? Is there an optimal size that regional policy should strive to maintain across different metropolitan regions?

The remainder of the report is structured as follows: Section 2 describes the data that we used for our analysis. Section 3 describes the econometric models we developed for each of the measures of interest, namely income, capital investment, unemployment, housing costs and commute distances. Section 4 presents predictions for the different measures across different population growth scenarios for the metropolitan regions of Sydney, Melbourne, Brisbane and Perth and surrounding major regional centres. Section 5 concludes with a summary of key findings from our analysis.