Productivity and urbanisation: how cities drive specialisation and economic growth

Productivity growth – expansion of outputs relative to inputs - is one of the most important variables in social science, with productivity growth being the key driver of gains in material economic well-being for billions of people over the last century. However, in recent times, productivity growth rates have slowed, and the economics profession does not have a satisfactory explanation for this observed pattern. This research advances our understanding of macroeconomic productivity by exploring its relationship with urbanisation intensity. Results from panel time series analysis show that slowing growth of urbanisation intensity explains a significant fraction of the inadequately explained but widely observed slow-down in productivity growth. Growth in urbanisation intensification is the most critical driver of macroeconomic productivity growth for the modern period (post World War 2 to present). This result is important for multiple reasons. First, existing quantitative research has been unable to adequately explain the observed pattern of productivity growth. As such, research efforts have struggled to identify meaningful candidate variables that explain the productivity growth slow-down problem. Secondly, the results are not easily explainable within the constraints of existing macroeconomic knowledge-based technology productivity theory. As such, this thesis advances productivity theory by presenting a logic chain built on microeconomic foundations. The microeconomic foundations used are an integration of the principal of gains from specialisation and trade under comparative advantage, integrated with gains from the division of labour as the extent of the market expands. This yields new insights into system-scale productivity, including providing a pathway for the economics of heterogeneity to be incorporated into macroeconomic analysis. The research shows that growth in urbanisation intensity was the critical component of productivity growth for many countries over the last 65 years. With urbanisation only able to occur once, this drives a requirement to find new pathways to achieve ongoing productivity growth as urbanisation intensification approaches exhaustion. This conclusion has a range of policy implications. Macroeconomics, productivity, total factor productivity, urbanisation, comparative advantage, specialisation, division of labour, gains from trade, micro-foundations, heterogeneity, the extent of the market.