Australia’s Small City Economies

Australia’s network of 31 small cities is growing and becoming increasingly productive with the opportunity to play an even larger role in national prosperity. The Regional Australia Institute (RAI) Deal or No Deal? report provides the context for how this prosperity can be encouraged.

The success of Australia’s small cities starkly contrasts with many other developed economies which are grappling with productivity in some second tier cities (e.g. Detroit, USA or Middlesbrough, UK ).

In this piece we answer six key questions about the economic roles of Australia’s 31 small cities:
1. What is the scale of the economic output?
2. What are their growth forecasts?
3. How significant is their share of national population?
4. What are their populations projected to be?
5. What is the level of their economic productivity?
6. What are their rates of participation in the labour force?

Economic Output and Growth

Australia’s small cities produced over $229.5 billion gross value added in 2013. This is a little over 15 per cent of Australia’s national output and internationally is comparable with the national output of Finland. Small cities anchor economic activity in a surrounding region and account for almost half of the regional output that occurs outside of Australia’s big five major cities.

Small cities show much more economic variety than many people might imagine when thinking about regional Australia. An overwhelming majority of small cities have a diverse economic base – where no single industry accounts for more than 20 per cent of the workforce.

The growth potential in small cities is also well established. Between 2002 and 2010, small cities’ output grew faster than metropolitan areas – delivering a 42 per cent gain in total economic output over the decade to 2013, comparable to metropolitan growth (Figure 1). This overall performance was supported by the provision of service industries to the growing mining and agricultural output boom.

Figure 1: Growth in output (Gross Value Added) from 2001 to 2013

Small cities are the hub of service provision in regional Australia. They produce 64 per cent of utilities, 72 per cent of financial services, 70 per cent of the media and IT and 66 per cent of the scientific output from regional Australia. Although most small cities do not yet have the concentration of these service industries that we see in the big five, they are clearly staking their place as part of the Australian urban economy.

For this growth and development to be sustainable it must be underpinned by a strong mixture of the ‘3Ps’; population, productivity and participation.

Population

Population is one of the key drivers of development and growth in Australia.

In 2013, small cities housed 1 in 5 Australians, totaling 4.6 million people, which is equivalent to the total population of New Zealand or slightly larger than Melbourne or Sydney.

Regional city population growth has been robust with rates ranging from 1.5 to 2 per cent per annum from 2002 to 2013. This population growth is expected to continue. Population projections to 2026 show an expected total increase of 16 per cent in small cities which is comparable to the 17 per cent projected for metropolitan areas.

However, when looking at each regional city individually, population growth is quite varied, as shown in Figure 2. Most small cities high in amenity (found in Northern Australia) top the growth list with a population growth rate of over 25 per cent in the next decade.

Figure 2: Map of small cities by population size and growth projections

Productivity Performance

At the heart of Australia’s prosperity is productivity improvements; delivering increased economic activity from the same or fewer resources.

The labour productivity performance of regional Australia has gone largely unrecognised in the national debate on this issue. The RAI has documented a significant regional productivity catch up that has been occurring in regional Australia across most industries over the last decade. This demonstrates the capacity for regions to contribute to the national productivity challenge.

Small city economies are internationally competitive in their productivity. With output per worker a little over $142,000 achieving twice the productivity of Korea and 97 per cent as productive as the USA.

In 2013 small cities were 88 per cent as productive as the big five, a gap much smaller than many would expect given the vast difference in the size of our small cities.

Productivity performance is not associated with city size, with our two largest small cities; Gold Coast-Tweed and Newcastle, relatively mid-level performers in terms of Gross Value Added per worker (e.g.  $149,208 and $142,097 respectively).

A few of our very small cities, such as Darwin and Latrobe, outperform the big five.

Importantly small cities have a higher output per worker than other types of regions in health care services and manufacturing industries and a higher productivity in mining and agricultural industries than the big five.

Participation

The strength of future growth opportunities also depends on the quality and type of participation by small city workforces .

Small cities have comparable participation rates to the big five (average 73.7 per cent of the working age population compared to the big five of 75.1 per cent). However, this hides the range; from Wagga Wagga with the highest city participation rate of 78 per cent to Fraser Coast with only 63 per cent of the working age population in the labour force.

A distinctive characteristic of Australia’s small cities is a bi-modal population distribution – meaning that they have more young people (0 -15 year olds) and old people (55+) than metropolitan cities (Figure 3A and 3B).

This bi-modal population delivers a working age gap. Where only 80 per cent of the over 15 year old population is within working age, compared to the metropolitan cities of 85 per cent.

This working age gap is growing. By 2026 small cities are expecting 21 per cent of their population to be over 65 years, while metropolitan cities are expecting only 16 per cent.

Aligned with a working age gap, is a skills gap in regional city participation. Small cities have marginally lower levels of professionals and managers. Still, they will need to attract more skilled professionals in order to become genuine economic hubs in the future.

Small cities have a different profile of skills attainment to metropolitan cities. Overall, small cities have a greater proportion of people with skills certificates and less people with bachelor degrees and higher.

However, there is great diversity even within this, some small cities like Hobart and Ballina-Lismore have higher than the national average of bachelor degrees (respectively 15 and 13 per cent of residents) while others like Fraser Coast and Gladstone have the lowest attainment levels (at 6 – 7 per cent).

Overall, participation is the most fundamental challenge for regional city growth amongst the ‘3Ps’, presenting both the greatest opportunity for gains and the greatest risk to future economic performance in the future.

Australia’s small cities are clearly a powerful economic force. They add a sizeable amount to national economic activity, and their performance in terms of the 3Ps of economic fundamentals is very strong. Our Regional Cities will see continuing strong population growth, their economic productivity per worker is very close to that of the big five, and their residents are generally highly engaged with the labour force. On all these economic measures our small cities demonstrate the performance necessary to warrant a seat at the national policy discussion table.