Does New Zealand need an urbanisation project to improve productivity?

(Update -31.10.17 -Jacinda Ardern is now the new Prime Minister of New Zealand leading a coalition government, which includes her Labour Party and the smaller New Zealand First and Green Party’s.)

It is election season in New Zealand and recently the two main contenders squared off in a televised debate.

Jacinda Ardern

One contender, Labour’s new leader, Jacinda Ardern was concerned about New Zealand’s lack of productivity growth. Jacinda stated that better access to tertiary education from Labour’s proposed three years free tertiary education policy would help correct the country’s poor productivity record. While the current Prime Minister and National party leader Bill English denied that New Zealand was in a productivity recession and defended his government’s economic performance over the last nine years.

JB Were is an investment broker -they are advising its clients to reduce their exposure to NZ equities and property. The report and analysis can be read here and here

I will leave it up to reader to decide who is right about New Zealand’s general productivity situation. What I would like to consider is whether New Zealand needs to commit to an urbanisation project to increase productivity in its cities? Would improving some aspects of urbanisation -transport, housing, infrastructure…. boost incomes and productivity?

Frequently, it is argued that Auckland’s roads are congested, that this wastes a large of amount of time and is a productivity loss to Auckland and the country. A recent NZIER report which focused on this issue indicated;

The benefits of de-congestion to current capacity in Auckland would be between $0.9 billion and $1.3 billion (1% to 1.4% of Auckland’s GDP).

Note the $0.9 to $1.3 billion benefit is based on the realistic assumption of a lower speed that maximises road carrying capacity (D), not a higher speed (A) that is equal to the speed limit, which some previous studies assumed.

The NZIER report shows that Auckland’s time delay at peak times is the second worst in Australasia. Auckland’s time delays are similar to much larger cities, such as Melbourne and Sydney, and is significantly worse than comparable sized cities, such as, Perth and Brisbane.

There is some problems with the contention that congestion is a cost. In some ways congestion is a symptom of success. Congestion is really a tipping point problem. Having too few travelers is as much an economic problem as having too many.

Also while NZIER’s de-congestion figures include flow-on benefits from time savings to businesses and households, they do not include the agglomeration benefits of improved accessibility. Such as, allowing more choice for business locations, and better skill matching for workers.

An alternative and I would suggest better way to improve urbanisation related productivity is to look at improving access and mobility. Specifically, by using a Bertaud type analysis of measuring the total number of workplaces a worker can easily access in an acceptable timeframe.

Alain Bertaud explains in ‘Cities as Labor Markets’ that agglomeration results from cities generating scale economies by firms reducing costs per unit, knowledge spillovers, and lowered transaction costs due to more competing suppliers and consumers in close proximity. Bertaud’s paper demonstrates that workers’ mobility –their ability to reach a large number of potential jobs in as short a travel time as possible, is a key factor in increasing urban productivity. Importantly, he gives some empirical data on this effect.

In Korean cities, a 10% increase in the number of jobs accessible per worker corresponds to a 2.4% increase in workers’ productivity.
In the US, Melo et al. show that the productivity effect of accessibility, measured by an increase in wages, is correlated to the number of jobs per worker accessible within a 60 minute commuting range. The maximum impact on wages is obtained when the number of jobs accessible within 20 minutes increases; within this travel time, a doubling in the number of jobs results in an increase in real wages of 6.5%. Beyond 20 minutes of travel time, worker productivity still increases, but its rate decays and practically disappears beyond 60 minutes.
Both papers demonstrate that workers’ mobility –their ability to reach a large number of potential jobs in as short a travel time as possible, is a key factor in increasing the productivity of large cities and the welfare of their workers. Large agglomerations of workers do not insure a high productivity in the absence of worker mobility. The time spent commuting should, therefore, be a key indicator in assessing the way large cities are managed. (p. 24, 25).

So we can conclude the benefits from investing in better transport infrastructure is quite large. For Auckland there is at least $1 billion of direct time saving benefits. And a further, unmeasured but probably much larger set of benefits to productivity and incomes from achieving greater access to as many city locations as possible, in as short a timeframe as possible.

Investing in better transport services for Auckland, depending on the specific cost/benefit business cases has the potential to have good payoffs. Also seriously worth considering is congestion road pricing, which would be very beneficial, for minimising travel delays and maximising the number of travelers able to use the road network.

There is another aspect to improving mobility outcomes. City residents may choose to permanently move house or job to avoid travel time delays. There is two ways this effect can exhibit itself -one negative, one positive.

Giving up on employment or not applying for specifically located work due to excessive time delays, inhibits agglomeration benefits, because it affects skill matching.

Being able to move residence to be closer to work (measured in time), will benefit agglomeration and therefore productivity and incomes. This ability will somewhat depend on the general housing affordability of a city. But most importantly it depends on the specifics of being able to build more city residences of the desired size, price and location, such that supply elastically responds to demand.

So the various proposed housing market reforms being discussed during this election season do have the potential to improve productivity in New Zealand’s cities.

Making it easier for cities to grow organically, both up and out has been my motivation for many of my articles -in particular my idea about reciprocal intensification. An idea which was first published on in August 2016 (Part two: of this article). The website Greater Auckland has reviewed legislative changes that will make reciprocal intensification easier in an article they published in August 2017.

Reciprocal intensification is my proposal for an acceptable way for New Zealand to grow its cities organically. Organic city growth has been very successful elsewhere, for instance Tokyo, which I about write here. There may be a better way to achieve organic growth than reciprocal intensification and certainly a broader package of urbanisation reforms will be needed.

I think it is an exciting time for urbanisation in New Zealand. A real conversation is being had on the nature of our built environment. Perhaps for the first time ever in New Zealand, certainly in my lifetime, issues of housing, transport and urbanisation in general are rising to the top of the public debate.

Over 80% of New Zealanders live in urban environments and 33% live in Auckland. Making those environments as productive as possible should be a priority for New Zealand.

I have tried in my own way to contribute to New Zealand’s housing and transport conversation with a collection of writings on a blogsite called -New Zealand needs an urbanisation project. Hopefully this article is a good contribution to that effort.

An example of the urbanisation conversation that is occurring in New Zealand is former NZ Reserve Bank economist -Michael Reddell has blogged about New Zealand’s general productivity situation. He discusses my article in the comments section of the following article.

In summary, Michael agrees that congestion charging and something along the lines of my reciprocal (voluntary intensification) idea would be beneficial but he is less convinced than I am about a broad policy “urbanisation project” approach being transformative for New Zealand.

I suspect we will not know how beneficial an “urbanisation project” will be for New Zealand until we have tried it.

New Zealand’s housing crisis is a barrier to entry into the Auckland labour market. David Schleicher, a Professor of Law at Yale Law School advocates that land use restrictions have become so tight they are now a significant barrier to entry to particular city based labour markets. David is very forthright in describing the productivity and economic costs of this barrier to entry. I report on this here.

New Zealand primarily uses immigration policy to solve labour market skill shortages. It is doubtful this will be successful in the long term without addressing the root causes of why New Zealand’s urban areas are unsuccessful, such as congestion and unaffordable housing.