Urban employment growth in NZ’s smaller cities

Local job networks may promote growth in big cities, but not in small ones. Wellington docks: Photo by James Coleman.

European regional policy promotes “smart specialisation” by encouraging regions to expand into activities that build on local strengths. The idea is that bringing together people with complementary skills helps them generate new ideas that boost innovation and growth. But does this actually work in a New Zealand context?

Research, recently published in the international journal Regional Studies, by Building Better researchers Benjamin Davies and Dr David Maré, Motu Economic and Public Policy Research, examines the potential for this way of generating ideas to promote urban employment growth in New Zealand. They find that, in New Zealand, the presence of related industries in an area is not a strong predictor of local employment growth. But why is that?

The pair describes new measures of relatedness and complexity that are more appropriate than existing measures for analysing the interaction among economic activities in small cities. “Relatedness” captures the extent to which the jobs in a region depend on the presence of other local activities. Activities are related if they require similar knowledge or inputs. In theory, workers benefit from the presence of other workers with complementary skills and businesses do better when related activities are present locally. “Complexity” refers to complex activities that are economically valuable because they generate relatively high revenue and embody tacit knowledge, which provides a source of competitive advantage. This, coupled with the principle of relatedness, is the framework for “smart specialisation”.

David and Benjamin used these new measures to find evidence of the contribution of relatedness and complexity to urban employment growth in New Zealand, where local labour markets are smaller than those in geographical areas studied previously in other countries.

“We find some evidence that relatedness and complexity are complementary in promoting employment growth within the larger cities in our data, where workers with similar skills interact more frequently, but no evidence that relatedness and complexity contribute to employment growth within the smaller cities in our data,” says David.

“Our results differ from those obtained using the relatedness and complexity measures applied in previous studies. This difference highlights the importance of using contextually appropriate measures when evaluating policies designed to create urban and regional growth and innovation.”

The researchers say more research is needed as it is an open question whether this absence of relatedness and complexity effects means that these effects do not operate or that New Zealand cities lack the scale for such operation.

“Our results may reflect the limited capacity for knowledge specialisation within New Zealand’s local labour markets. Alternatively, our failure to identify strong effects may reflect how, within New Zealand and during our period of study, policies were not explicitly designed to encourage or support relatedness and complexity. The absence of such targeted policies may have prevented any potential employment growth benefits of smart specialization policies from being realised.

“Likewise, it is an open question whether there is a limited spatial horizon for the growth and innovation benefits of related activities’ interaction. A comparison of city- and zone-level growth dynamics shows that the apparent benefits of such interaction depend upon the spatial scale at which those benefits are measured. This dependence may, in turn, depend on the presence of geographically distributed inter-firm networks, such as integrated supply chains and ‘virtual enterprises’ that facilitate more distant interactions among related activities.

“Also, while our analysis focuses on the contribution of relatedness and complexity to urban employment growth, future research could examine the contribution of these measures to other outcomes such as innovation, entrepreneurship, and firm entry and exit,” says David.

The study, “Relatedness, Complexity and Local Growth”, received funding from Te Pūnaha Matatini, and from the Better Homes, Towns and Cities National Science Challenge.

For further information please contact David Maré.

Read the research

Davies, B. & Maré, D. (2021). Relatedness, complexity and local growth. Regional Studies, 55, 3, 479-494. DOI: 10.1080/00343404.2020.1802418
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Date posted: 21 June 2021