Firms in big cities    
hire well and price to compete    
Are they better firms?

This study estimates differences in productivity (mfp) across New Zealand urban areas, with a focus on the size of Auckland’s productivity premium. The estimates are based on analysis of firm-level data from Statistics New Zealand’s Longitudinal Business Database. The methods used in the paper overcome some of the biases that arise in standard approaches to spatial productivity estimation - biases arising from imperfect competition, spatial price variation, firm heterogeneity, and labour-sorting across cities. Ignoring these factors leads to biased estimates of the Auckland’s relative productivity performance. The study also investigates industry differences in spatial productivity patterns.

The paper provides improved estimates of urban productivity differences in New Zealand than have been available to date. It confirms that firms in Auckland have on average 13.5% higher labour productivity relative to firms in other urban areas. It attributes 5.6 percentage points of this to the greater quantity of other inputs used by Auckland, and a further 5.7 percentage points to the higher quality of Auckland workers. Finally, we have demonstrated that failing to account for spatial variation in input and output prices biases downward the estimates of the Auckland premium, by 3 to 6 percentage points.