Study: Urban economies and productivity

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Canadian manufacturing plants located in urban areas are more productive when these urban areas have the right mix of labour and industries, according to a new study.

The study found that productivity depends on the economic environment in which firms operate, and that cities are one of the key aspects of this economic environment.

This study contributes to our understanding of industry clusters by testing the mechanisms by which individual plants benefit from locating in the same area as other firms in the same industry.

Using plant-level data from the 1999 Annual Survey of Manufactures, and controlling for a number of plant and firm characteristics, the study showed that the productivity performance of plants was positively influenced by three characteristics of urban areas.

First, plants were more productive when there was a close match between the worker skills they required and the skills available in the urban area in which they were located.

Secondly, they were more productive when they were located in cities that specialized in upstream (input-supplying) industries.

Finally, plants were more productive when there was a larger number of nearby plants in the same industry, providing more opportunity for the spillover of knowledge across plants.

Among these three characteristics of urban areas, the right mix of labour is the most important contributor to labour productivity.

Location of industry an important determinant of labour productivity

The geographic location of industry is an important determinant of labour productivity, the study found.

The geographic clustering of plants both stimulates, and is stimulated by, the concentration of upstream suppliers, pools of skilled labour and the exchange of knowledge.

Plants are more productive when there is a close match between the worker skills they require and the skills available in the urban area in which they are located.

The co-location of firms is often associated with the development of relatively large pools of labour possessing the skills that are needed by firms within the geographic cluster. Firms that do not have access to these pools of specialized labour may have to substitute workers with less appropriate skills, potentially reducing their productivity.

Plants are more productive when they are located in cities that are specialized in upstream (input-supplying) industries. The geographical clustering of businesses stimulates the development of upstream industries that provide specialized inputs, such as machinery and equipment, that can help boost the productivity of a downstream sector.

Finally, plants are more productive when there is a larger number of nearby plants in the same industry, providing more opportunity for the spillover of knowledge across plants. The close proximity of firms enhances the flow of knowledge and consequently has a positive impact on productivity.

These mechanisms explain why firms choose to form clusters, and why productivity is higher in firms that locate within these clusters than in those that locate outside them.

How urban economies affect productivity in specific sectors

In addition to looking at the impact of agglomeration economies on productivity across the entire plant population, the study also examined how these economies affected the productivity of plants in specific sectors.

These sectors are defined by the factors that influence competition: access to natural resources, labour costs, scale economies, product differentiation, and the application of scientific knowledge.

The study showed that the reliance of individual businesses on place-based economies varied across sectors. Labour mix, buyer-supplier networks or knowledge spillovers were not universally important across all sectors. Yet regardless of which agglomerative forces were important, they had a significant effect on productivity in most sectors.

Hence, the geographic concentration of industry has a positive influence on performance across a broad spectrum of sectors comprising business establishments that rely on very different strategies to maintain their competitive advantage.

These findings help explain why plants in the same industry tend to cluster in particular locations. They also help explain how the concentration of economic activity in cities favours economic growth that is underpinned by gains in productivity.

The study "Urban Economies and Productivity" as part of the publication Economic Analysis Research Paper Series (11F0027MIE2007045, free), is now available from the Publications module of our website.

More studies related to economic geography and productivity are available online (/studies-etudes/econo-eng.htm).

For more information, or to enquire about the concepts, methods or data quality of this release, contact Mark Brown (613-951-7292) or John Baldwin (613-951-8588), Micro-economic Analysis Division.