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Agglomeration economies can be understood as the combination of cost savings, efficiencies and increased market potential that benefit firms when they locate in more heavily populated cities or cities with a greater diversity of firms, economic sectors and workers.

For Australian cities moving from a city of 500,000 to 1 million gives a 6.1 per cent higher wage rate, although this result is not statistically significant. There is no evidence of a drop in productivity at higher city scales.

The research finds productivity benefits from higher wages do not accrue to all workers but are concentrated in the higher income distribution. Despite this, housing costs are pushed up across the income distribution. However, higher housing costs do not fully offset the gains from higher productivity.

Policy options include investment in major infrastructure for regional areas and cities (and satellite cities) that have already been identified as locations of population and economic growth; increased support for transport connectivity between major and regional / satellite cities; support of knowledge-industry activities; and expanding affordable rental supply in Australia’s inner urban areas together with the development of diverse and affordable rental housing in regional areas.

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AHURI Final Report 371