This report considers evidence about the existence and scale of agglomeration economies, including in Australian cities. It examines whether city size affects productivity, and whether economic productivity, city size and rising housing costs are interdependent.

Key points:

• Based on international evidence, there is a prima facie case that the economic productivity gains arising from city scale are being eroded by negative factors, including congestion and adverse housing outcomes—such as unaffordability.
• International and internal migrants have begun to disperse from metropolitan areas and migrate directly to new smaller areas, particularly in North America and Europe. The major metropolitan areas are losing the largest share of net domestic migrants, while domestic migration is accelerating suburbanisation within metropolitan areas.
• Empirical results suggest that, for US cities, a city of 1 million people would imply a wage rate 7.6 per cent higher than a city of 500,000 population.
• For Australian cities, the evidence of a productivity gain from higher city scale is weaker, and the estimates are smaller than for US cities. The results are inconclusive, probably reflecting the short time series of data available to the project, but there are indications that agglomeration economies might appear at smaller city scales in Australia compared to the USA and the EU.
• Population is positively associated with higher wage rates in Australian cities. There are also positive impacts on the number of businesses and total jobs. The results suggest that having larger cities could therefore yield a productivity dividend.