Building prosperity at a city’s edge
Updated: Feb 16
Often in a city the economies of the locales on a city’s periphery are different to those near the centre. The difference? The preponderance of knowledge and technology intensive businesses toward the city’s core. Life for those on the periphery could change if this imbalance was addressed.
There are many factors that contribute to the success of a local economy. There is the sense of place: the physical profile of a locale to which the natural and built environment contributes. There is the sense of community: the people, the history, the personalities, the sports, the disappointments, the celebrations and the stories that are told by its inhabitants. And there is the sense of the bigger picture: how the local economy fits into the larger national economy, what connections it has with the other economies around the world and the relationships that it has forged with those outside of its locale.
Aside from these factors, there are the components of the local economy. Each playing their part in any ongoing success. One component is the resources that are used by various industry sectors, another the amount of capital that can be called upon, and a third the breadth and depth of available labour. Self-evidently the types of resources differ between local economies. For some, abundant and fertile agricultural land defines what it produces, others have long established manufacturing plants, and then there are the locales that rest on financial or medical expertise. With each of these and other types of locales attracting flows of finance in accordance with profiles of risk and reward.
However, the component that dominates conversation, media attention, and governmental attention is labour. The workforce. The skills of those who work in the local economy and the opportunities they have. The size and quality of the pool of people from which local industry can draw.
The Human Development Index
The human development index (HDI), an internationally recognised indicator of how well people are doing, is linked to employment. This index recognises the relationship between work and the quality of life that people experience. There are three dimension to this index: health, education and the standard of living. The focus of this article is on the income dimension (and to a lesser extent level of education).
At the risk of stating the obvious, there is a strong relationship between the quality and strength of employment and how well the inhabitants of a local economy are flourishing. And one way to analyse the contemporary and prospective employment opportunities of a local economy is through the lens of employment multipliers.
Fig 1. Influence of knowledge and technology on the local economy
To a greater or lesser extent all jobs affect other jobs. Ceteris paribus, someone with a higher paying job has more disposable income than someone with a lower paying job. Some or all of that income differential is spent locally. The effect – the multiplication of employment. It can be seen that the more higher paying jobs a local economy has, the greater the potential for more people to be employed in jobs paying wages at lower levels.
Generally speaking, these higher paying jobs are in the tradable sector. The lower paying jobs are in the non-tradable sector. Further, the more specialised the job and the more specialised the business operating in the tradable sector, the greater the employment multiplier. These specialised jobs and businesses are found in industry sectors providing either high-tech manufactured goods or knowledge-intensive services. These sectors are much studied and have specific meaning within the national statistical agencies across the world.
Eurostat, the statistical agency for the European Union, grades manufacturing according to its technological intensity (e.g. manufacturing a vaccine requires a higher level of technology than steel frames for a house). It takes a similar approach to grading the knowledge intensity of services (e.g. delivery of post-graduate education requires a higher level of knowledge than delivery of bookkeeping services).
Knowledge intensive and technology intensive industries
Now, pulling these thoughts together leads, in very simple terms, to the following conclusion – the potential for people who live and work in a locale to be better off is dependent upon the technological and knowledge intensity of the local economy. That is, the greater the proportion of high-tech manufacturing and knowledge intensive service activities in the locale’s gross regional product, the greater the employment opportunities are in other industry sectors. In fact, Moretti and others find the following: every job in the tradable sector leads to 1.6 jobs in the non-tradable sector; every skilled job in the tradable sector leads to 2.5 jobs in the non-tradable sector; and every high-skilled job in high-tech manufacturing leads to 4.9 jobs in the non-tradable sector.
Thus, there are broad human development benefits to the local population by having a good portion of the local economy driven by knowledge intensive and technology intensive industries.
Fig 2. Technology and Knowledge Intensity Index
And this is the problem for growing communities, particularly those on the “outskirts” of cities.
The people in these perimeter locales often commute away from these locales. With attendant social and infrastructure problems that build over time.
The economy in these perimeter locales is usually defined by construction-related industries. And when the population growth ends, so does the pace of construction. Leading to reduced local economic activity.
The intensity of a locale’s technology and knowledge industry is described in Figure 2. This index, using Eurostat’s NACE classification, reflects the composition of the local economy. The chart shows how this composition changes over time. The greater the proportion of businesses operating in technology and knowledge intensive industry sectors, the greater the number.
The different growth trajectories
The primary observation here is the difference in growth trajectory between established local economies and those with a population that is growing relative to the established locales. The economies of these established locales, generally toward the centre of a metropolitan area, are weighted toward higher intensity of technology and knowledge. The economies of the growing locales, generally located toward the outer parts of a metropolitan area, don’t have a high proportion of technology and knowledge intensive businesses.
The other significant observation that can be drawn from Figure 2, is that this difference holds over quite a period of time. That as time goes on, the intensity of knowledge and technology economic activity between the two geographical areas of the metropolis continues to diverge.
Finally, one implication of this divergence is this: the people of these outer metropolitan areas will be better off over the long term if a greater focus is given to developing technology and knowledge intensive businesses as these locales grow.
UNDP (2015) “Work for Human Development”
Moretti (2012) “The new geography of jobs”
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