2. Sectors
The ability of firms to improve their productivity when they are co-located with other firms is an underlying feature of agglomerated economies. However, it is likely that certain types of firms and industries are more able than others to benefit from co-location and activities may be "sorted" to gain the greatest advantage. In this section, we discuss the ways in which sectors appear in agglomeration economies, as well as recalling earlier debates about whether urbanisation or localisation economies are most important.
Our empirical research adds to existing knowledge about the sectoral makeup of Auckland's economy, by looking at sub city-region areas such as the CBD. This research includes an assessment of whether high earning sectors are disproportionately located in the CBD contributing to higher productivity, or whether sectors more generally exhibit higher productivity in the CBD.
2.1 Literature Review
The following table notes two key studies on sectoral composition in agglomerated areas.
Table 2.1 Studies of Sectors
| Author |
Key Finding |
| Graham3 |
Service activities appear to be most sensitive to agglomeration benefits. |
| Duranton & Puga4 |
Large cities are increasingly specialised according to functional activities, rather than sectoral activities. |
Much of the agglomeration literature has focused purely on manufacturing sectors. However it is increasingly apparent, in the recent literature, that service economies may be most sensitive to agglomeration effects. This was found by Graham in his research on sectors and agglomeration in the UK,5 and Kolko in his US research.6
Research in the New Zealand context has found that business services and wholesaling are highly concentrated in Auckland.7 Business services were defined in this research to include "property and business services" and "financial and insurance services", as per Statistics New Zealand classifications.
Recent research by Maré & Timmins provides the most comprehensive assessment of economic concentration by sectors in New Zealand, advancing existing knowledge about the composition of the New Zealand economy.8 This produced a set of interesting results, including the finding that while service activities are heavily concentrated in Auckland, there is little evidence to suggest that they are achieving agglomeration benefits. One possible explanation for this may be the authors' examination of "labour market areas", which involve the aggregation of census area units (CAUs), as agglomeration benefits being achieved at the individual CAU level may not be revealed.9
2.1.1 Changes in Sectoral Composition
The sectoral composition of city economies has shifted in recent decades. As a consequence of this, functional specialisation is now identified in the literature as the driver behind the agglomeration benefits being achieved in many large cities.
Functional specialisation refers to the specialisation of a like set of activities such as business, management and financial services that interact with a number of sectors.10 Sectoral specialisation on the other hand, refers to the specialisation of activities within a particular sector, such as manufacturing.
The increasing functional specialisation found in large cities, can be explained by changes in firm organisation, "specifically to the increasing separation of the management and production functions of individual firms", which can now be achieved following advances in transport and communication technologies.11 Put simply, when the additional costs associated with managing production from a remote headquarter are low, firms have an incentive to shift the location of their production and management functions away from each other to best utilise the economic advantages presented in different places.12
Duranton & Puga claim that while functional specialisation is increasingly found in large cities, small cities are still disposed to sectoral specialisation where standardised production processes are disproportionately located.13
Consideration of functional specialisation highlights definition as a key issue. For instance, business services, although classified as a sector, may more accurately resemble functional economic activities, given that they are used by a range of different sectors for a like purpose.
The maturity of a firm and its industrial life cycle may influence whether a firm locates in a sectorally diverse or sectorally specialised city. Research has shown that while new firms evolve in diverse cities, they move to industrially specialised cities upon reaching maturity.14 As Henderson remarks: "The Duranton & Puga model captures a key role for large diversified metro areas… [as] incubators where new products are born and where new firms learn. Once firms have matured they typically relocate to more specialised cities".15
Finally, functional specialisations in a city may be particularly appealing to workers, given the protection from industry-specific collapse that is afforded from having more than one industry active in the economy. Simon's research shows that workers in a single industry city economy will demand a wage premium relative to workers in a city constituted by a diverse range of industries, due to the risk they face.16
2.1.2 Urbanisation or Localisation Economies
Research, like Duranton & Puga's, which identifies shifts in the sectoral make-up of cities, recalls earlier debates around whether urbanisation or localisation economies provide the best explanation of the agglomeration benefits being achieved. Localisation economies describe the benefits that occur through increased scale, when firms within a particular industry choose to co-locate in an area. In essence the scale economy is external to the firm, but internal to the industry. Urbanisation economies, on the other hand, describe the benefits that arise from the co-location of firms in large urban areas. The benefits are not concentrated at the industry level, and refer to, for example, common infrastructure, an available and diverse labour force, and market size.
Duranton & Puga argue that functional specialisation is more likely to lead to urbanisation economies, while sectoral specialisation is more likely to lead to localisation economies.17
2.2 Auckland Findings
2.2.1 Introduction
Our empirical research examines the sectoral makeup of Auckland's CBD, providing clues as to whether functional or sectoral specialisation is at play.
2.2.2 The CBD and Auckland City
The numbers employed in each of the sectors both in Auckland City as a whole and in the CBD, are set out in Table 2.2 and Figure 2.1.
Table 2.2 Employment by Sector 2001: Auckland City and Auckland CBD
| Sector |
Auckland City |
CBD |
| Number |
Per cent |
Number |
Per cent |
Employment as % of City |
| Agriculture, Forestry and Fishing |
567 |
0.3% |
96 |
0.2% |
16.9% |
| Mining |
15 |
0.0% |
0 |
0.0% |
0.0% |
| Manufacturing |
27432 |
13.0% |
1959 |
3.4% |
7.1% |
| Electricity, Gas and Water Supply |
663 |
0.3% |
9 |
0.0% |
1.4% |
| Construction |
7764 |
3.7% |
693 |
1.2% |
8.9% |
| Wholesale Trade |
21480 |
10.2% |
2979 |
5.2% |
13.9% |
| Retail Trade |
21141 |
10.0% |
3411 |
6.0% |
16.1% |
| Accommodation, Cafes and Restaurants |
9807 |
4.7% |
4716 |
8.3% |
48.1% |
| Transport and Storage |
7815 |
3.7% |
3414 |
6.0% |
43.7% |
| Communication Services |
4581 |
2.2% |
2067 |
3.6% |
45.1% |
| Finance and Insurance |
12501 |
5.9% |
7104 |
12.4% |
56.8% |
| Property and Business Services |
43587 |
20.7% |
17919 |
31.4% |
41.1% |
| Government Administration and Defence |
4479 |
2.1% |
3351 |
5.9% |
74.8% |
| Education |
14832 |
7.0% |
3606 |
6.3% |
24.3% |
| Health and Community Services |
16038 |
7.6% |
843 |
1.5% |
5.3% |
| Cultural and Recreational Services |
7896 |
3.8% |
3363 |
5.9% |
42.6% |
| Personal and other Services |
7566 |
3.6% |
1422 |
2.5% |
18.8% |
| Not Elsewhere Included |
2361 |
1.1% |
171 |
0.3% |
7.2% |
| Total |
210456 |
100.0% |
57129 |
100.0% |
27.1% |
Source 2001 Census, Statistics New Zealand
Figure 2.1: Sectoral Composition 2001: Auckland CBD and Auckland City
→ Full size version of Figure 2.1 [67 kB JPG]
Source 2001 Census, Statistics New Zealand
In 2001, the CBD contained just over a quarter of the jobs within Auckland City (27.1%), but with substantially higher proportions of the total in advanced business sectors such as Finance and Insurance, Communications Services, and Property and Business Services. The CBD also contains significantly above average shares of workers in Government, and the hospitality sectors of Accommodation, Cafes and Restaurants, and Cultural and Recreational Services. These high shares are balanced by relatively low shares in the primary, manufacturing and wholesale, retail and health sectors.18
2.2.3 The Regional Perspective
The comparison of the breakdown of activity between the CBD, Auckland City and the Auckland region as a whole is provided in detail in Appendix B. The main differences between the region and Auckland City are the lower regional shares of key business services, particularly Property and Business Services and Finance and Insurance. These are counterbalanced by higher regional shares for Agriculture, Manufacturing, Construction and Retailing.
Comparing the CBD with Auckland City and the Region, the CBD demonstrates high levels of specialisation, with almost half the workforce working in the Advanced Business sector of Communications, Finance and Insurance and Property and Business Services. This compares with less than 30 percent in Auckland City and just over 20 per cent for the Region.
2.2.4 The Impact of Sectoral Composition on Average Earnings
The earlier work on agglomeration indicated that variations in sectoral composition at a CAU level could affect the relationships between density and productivity (as measured by average earnings), and in particular, the effects of a relatively large retail sector on average earnings for Newmarket and Sandringham North. One key issue for this current phase of work was therefore to examine whether the high earnings identified for the Auckland CBD were the result of concentration of activities in sectors for which average productivity was high across the Region, or whether productivity within particular sectors was simply high in the Auckland CBD. This builds on the analysis of sectoral composition described above.
The average earnings by sector within the CBD, Auckland City and Auckland Region, are set out in Table 2.3.
Table 2.3: Average Earnings by Sector 2001: Auckland Region, Auckland City and Auckland CBD
| Sector |
Auckland Region |
Auckland City |
CBD |
| Agriculture, Forestry and Fishing |
28500 |
36400 |
44900 |
| Mining |
46800 |
57200 |
(120000)* |
| Manufacturing |
37700 |
39300 |
42000 |
| Electricity, Gas and Water Supply |
53300 |
55000 |
61700 |
| Construction |
37500 |
41100 |
48000 |
| Wholesale Trade |
42800 |
45600 |
56100 |
| Retail Trade |
24700 |
27500 |
27100 |
| Accommodation, Cafes and Restaurants |
20300 |
22500 |
24200 |
| Transport and Storage |
39700 |
39500 |
43300 |
| Communication Services |
42300 |
45600 |
52300 |
| Finance and Insurance |
49600 |
51900 |
55900 |
| Property and Business Services |
46900 |
50800 |
56100 |
| Government Administration and Defence |
40700 |
43500 |
44200 |
| Education |
35800 |
38700 |
41500 |
| Health and Community Services |
35100 |
37800 |
38200 |
| Cultural and Recreational Services |
33600 |
38300 |
40600 |
| Personal and other Services |
31900 |
34700 |
39900 |
| Not Elsewhere Included |
23400 |
26000 |
38800 |
| Total |
37000 |
41000 |
47100 |
Source 2001 Census, Statistics New Zealand
*Figures for the mining sector in the CBD suggest that there are likely to be head office effects at play. The small numbers employed and potential rounding errors in the data mean that the results are probably unreliable.
Earnings for those employed within the Auckland CBD in 2001 were about 27 per cent above the average for the Region ($47,100 compared to $37,000 for the Region). Average earnings of $41,000 for Auckland City were above the regional average, but were about 15 per cent below the average for the CBD.
To assess the impact of the different sectoral composition on average wages, the average wage for the CBD has been estimated. We have assumed that the CBD has the same sectoral composition as the Auckland Region (as set out in Table 2.5) but that the average wage levels for the CBD set out in Table 2.3 above apply.
If the sectoral composition in the CBD mirrored that of the Region as a whole the average earnings in the CBD would amount to about $43,700. The impact of the different sectoral composition would therefore account for about $3,400 of the difference between the regional and CBD average, with differences in earnings within sectors and other factors accounting for the remaining $6,700. Compared to the regional average, the higher productivity of CBD workers would give an average wage rate which is about 18 per cent higher than that for the Region. This is a measure of the agglomeration benefits of the CBD. The extent to which this reflects different levels of educational attainment is explored in the following section. To some extent, the differences may reflect different types of jobs within the broad sectors defined, but these in turn may be a sign of the greater opportunities in an area of dense activity and may therefore be an integral component of the agglomeration process.
A similar approach has been used to compare the position in the CBD with that in Auckland City. If the CBD had the same sectoral composition as Auckland City, but retained the average sectoral wage rates set out in Table 2.3, the overall average wage rate in the CBD would amount to about $45,000. Of the total difference of $6,100 between wages in the CBD and those for Auckland City, sectoral differences account for about $2,100 and differences in productivity for about $4,000.
In both cases, comparing overall wages and productivity in the CBD against those for Auckland City and Auckland Region, differences in productivity within individual sectors account for the greater part of the difference, typically 60-70 per cent of the total, with the impact of different sectoral composition accounting for only about a third of the difference. As a result, there appears to be substantial agglomeration effects within the CBD.
2.2.5 Other Analysis by Area
In addition to considering the differences between the CBD, Auckland City and the Auckland Region, we have also determined the average earnings before any adjustment for sectoral composition for each of the four main cities within the Region. These are set out in Table 2.4.
Table 2.4: Average Income by Area 2001
| Area |
Average Income ($pa) |
% of Regional Average |
| Auckland Region |
37,000 |
100% |
| Auckland City |
41,000 |
111% |
| Auckland CBD |
47,000 |
127% |
| Manukau City |
35,500 |
96% |
| North Shore City |
34,500 |
93% |
| Waitakere City |
31,000 |
83% |
Source 2001 Census, Statistics New Zealand
This information demonstrates that there are considerable differences in the earnings (and potentially the productivity) between the constituent parts of the Region. Average earnings in Waitakere City are only 75 per cent of those in Auckland City, and only 65 per cent of those in the CBD.
2.2.6 Analysis of Employment in Selected Centres by Sector
Given the earnings differences in the six areas of the region, we have looked at the sectoral composition for a selection of key centres. These centres include:
- CBD
- Newmarket
- Ellerslie South
- Penrose
- Mt Wellington South
- Manukau Central
- Takapuna Central
- Henderson
- New Lynn
With the exception of the CBD, these are all based on one individual CAU.
The sectoral composition of each of these areas is set out in Table 2.5 and displayed graphically in Figure 2.2.
Table 2.5 Breakdown of Employment by Sector in Selected Centres 2001
| Area Unit |
T. Emp19 |
M |
C |
WT |
RT |
ACR |
TS |
ABS |
GaD |
Ed |
HCS |
CRS |
POS |
Other |
NS |
| Auckland CBD |
57,132 |
3% |
1% |
5% |
6% |
8% |
6% |
47% |
6% |
6% |
2% |
6% |
3% |
9% |
0% |
| Newmarket |
8,175 |
6% |
1% |
8% |
19% |
4% |
3% |
43% |
0% |
5% |
4% |
3% |
2% |
9% |
0% |
| Ellerslie South |
4,962 |
19% |
2% |
16% |
5% |
2% |
2% |
44% |
2% |
2% |
1% |
0% |
2% |
11% |
1% |
| Penrose |
9,384 |
29% |
7% |
19% |
7% |
2% |
10% |
21% |
0% |
2% |
0% |
1% |
2% |
5% |
0% |
| Mt Wellington South |
12,279 |
37% |
5% |
31% |
4% |
1% |
6% |
14% |
0% |
0% |
0% |
0% |
0% |
2% |
1% |
| Manukau Central |
11,913 |
26% |
3% |
16% |
19% |
2% |
5% |
13% |
7% |
2% |
2% |
1% |
3% |
5% |
0% |
| Takapuna Central |
6,930 |
2% |
2% |
3% |
12% |
6% |
2% |
45% |
12% |
3% |
4% |
3% |
6% |
9% |
1% |
| Henderson |
6,534 |
25% |
3% |
4% |
23% |
3% |
1% |
13% |
5% |
7% |
7% |
2% |
6% |
8% |
1% |
| New Lynn |
5,241 |
26% |
6% |
8% |
28% |
5% |
1% |
14% |
1% |
2% |
2% |
2% |
3% |
6% |
1% |
| AKC |
210,429 |
13% |
4% |
10% |
10% |
5% |
4% |
29% |
2% |
7% |
8% |
4% |
3% |
9% |
1% |
| ARC |
467,640 |
15% |
6% |
9% |
12% |
4% |
4% |
22% |
3% |
8% |
8% |
3% |
4% |
10% |
2% |
Source 2001 Census, Statistics New Zealand
Figure 2.2: Auckland Region 2001: Sectoral Breakdown for Selected Areas
→ Full size version of Figure 2.2 [105 kB JPG]
Source 2001 Census, Statistics New Zealand
Employment in advanced business services is high in the Auckland CBD, Newmarket, Ellerslie South and Takapuna Central, with a share of more than 40 per cent of the total. However these areas display significant differences in the breakdown of other activities, reflecting their different functions within the Region.
In the CBD, the second most important sector is Accommodation, Cafes and Restaurants reflecting its central location and the support it provides to the advanced business service sector. In Newmarket, the second most important sector is Retailing, which, as noted in earlier work, has tended to depress the average level of earnings within the centre. This may also reflect the relatively large population within easy reach of the centre, especially given its accessibility. In Ellerslie South, the wholesaling and manufacturing sectors are very important and suggest that the business services in the area may, in part, serve the particular needs of these local activities as well as a wider function. In Takapuna Central, there is also a relatively large retail sector. The share of Government, Administration and Defence is also high in Takapuna Central, reflecting its role as the administrative centre of North Shore City.
Within these four centres, there are clear differences in terms of dominant sectors. While the CBD has a high proportion of employment within Advanced Business Sectors, the shares of other activities are small and the share of the second and third largest sectors (Accommodation etc, and Retail only amounts to about 14 per cent of the total). In Newmarket, the second and third largest sectors (Retail and Wholesale Trades) account for about 27 per cent of total employment, in Ellerslie South they (Manufacturing and Wholesale) account for 35 per cent of employment, and in Takapuna they (Retail and Government) account for about 24 per cent.
For the other areas selected, different patterns emerge with a much smaller share of Advanced Business Services. In Manukau Central, the dominant activities are Manufacturing (26%) and Retail (19%) with Advanced Business services only accounting for 13 per cent of the total. In Henderson and New Lynn, the dominant activities are again Manufacturing and Retail, with Advanced Business Services having a share of only 13-14 per cent. By way of contrast, Penrose and Mount Wellington have very high shares for Manufacturing, with this being supported by Wholesaling in Mount Wellington and Advanced Business Services in Penrose.
From our appraisal of the literature, one might expect to find agglomeration effects in the CBD being driven by functional specialisation, rather than sectoral specialisation. Figure 2.2 lends support for the idea that functional specialisation is occurring in Auckland's CBD. For instance, the CBD is shown to be the most sectorally diverse centre (relative to other centres which are dominated by two or three sectors), with 55% of the activity split relatively evenly across 10 sectors.20 We suggest that much of the activity in these sectors may be attributable to headquarter effects. The remaining 45% is attributable to business, property and financial services, which we contest, following Duranton & Puga's research, are more akin to functional activities given their likely utilisation by a broad range of sectors. From this we suggest that urbanisation economies may be more important in Auckland's CBD than localisation economies.
It is also interesting to note that more land extensive sectors like Wholesaling and Manufacturing, having strong concentrations in the Penrose/Ellerslie South/Mt Wellington industrial area. These activities are likely to benefit from good accessibility to the motorway, essential for the transportation of bulk goods, while benefiting from lower land prices outside the CBD.
2.3 Summary
Our empirical research shows that average earnings in the CBD, across all sectors, are higher than in Auckland City and in the Auckland Region. The research also shows that the sectors with the highest average earnings are disproportionately located in the CBD. However, further investigation leads to the finding that only about a third of the wage premium achieved by workers in the CBD can be attributed to sectoral composition, at least at the level defined, showing that other agglomeration effects are important.
Our empirical findings support the research of Graham in the UK, who finds that service economies are most sensitive to agglomeration benefits. Additionally, our findings, although not proven, lend support to the notion that Auckland's CBD is achieving agglomeration benefits according to functional specialisation. This is due to the concentration of business service functions, as is being seen in large cities overseas. We suggest, furthermore, that given the sectoral diversity identified in the CBD, agglomeration benefits may be attributable to urbanisation economies, or in other words, the benefits that stem from being located in a large employment area with big city infrastructure.
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