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ESTIMATION OF AGGLOMERATION ELASTICITIES FOR WIDER ECONOMIC BENEFITS FOR TRANSPORT PROJECTS

The ABS and KPMG were recently engaged by the Department of Infrastructure and Regional Development (DIRD) to estimate agglomeration elasticities for measuring the agglomeration economies of transport projects in Australia. Agglomeration economies refer to the productive advantages that arise from the spatial concentration of economic activities (Mare and Graham, 2009). When firms locate in close proximity to each other, a number of productivity benefits can emerge, for example, increased opportunities for labour market pooling, knowledge and technology sharing, industry specialisation, and increased efficiency of input-output sharing.

A set of agglomeration elasticities by industry division in major Australian cities was calculated using econometric modelling of firm level information from ATO tax data for the years 2006/07 and 2011/12. The estimation was based on the production economic framework and utilised statistically robust methods. We estimated the effect of agglomeration on firm total factor productivity (TFP) by including the effective density¹ measure as a variable in a Cobb-Douglas production function (Graham, 2007 and Graham et al., 2009).

The detailed report of the econometric modelling work is provided in Appendix C of the KPMG discussion paper entitled, “Measuring WEBs in Australian cities” which was released for public consultation in June 2017 (KPMG 2017). The KPMG discussion paper also contains methodologies and parameters for estimating all three categories of WEBs expected to arise from large transport projects in urban areas, namely Agglomeration impacts, Labour market impacts and Output change in imperfectly competitive markets. These are important inputs to the updating and expansion of the Australian Transport Assessment and Planning (ATAP) Guidelines, which outline the best practice for transport planning and assessment in Australia. The update is being undertaken by DIRD in partnership with state and territory infrastructure and transport agencies.

¹KPMG defines effective density as a quantitative measure of access to opportunities. An opportunity refers to any activity that a user wants to access. In the context of agglomeration, the relevant opportunity is typically jobs. Effective density is quantified using a measure of travel impedance, typically a function of distance, time or generalised cost of travel (KPMG 2017, p.40). KPMG estimated and provided area effective density measures to the ABS for use in the estimation of agglomeration elasticities.

References

Graham, D. J. (2007) 'Wider economic benefits of transport investment: Evaluating the application of UK agglomeration elasticity estimates in the New Zealand context', Report to Land Transport New Zealand, Wellington.

Graham, D. J., Gibbons S. and Martin, R. (2009) 'Transport investment and the distance decay of agglomeration benefits', Report prepared for the UK Department of Transport, Imperial College, London.

KPMG (2017) 'Measuring WEBs in Australia Cities', KPMG Discussion Paper, 01 June 2017, Melbourne. Available at URL:

Maré, D. C. and Graham, D. J. (2009) 'Agglomeration Elasticities in New Zealand, NZ Transport Agency Research Report 376', Wellington.

Further Information

For more information, please contact Franklin Soriano Franklin.Soriano@abs.gov.au

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