Sydney still attracts a big share of overseas migrants but expensive property and traffic gridlock drive thousands away from the city each year. In the last financial year, NSW lost nearly 4000 people to Victoria, many of them well-educated, highly productive workers aged in their 30s, in search of cheaper housing or a shorter commute. Should Sydneysiders care about the prospect of becoming Australia’s second city? I think it does matter, not because of petty interstate rivalry but because Melbourne’s catch-up is proof that Sydney isn’t functioning well. The narrowing population gap exposes deep structural problems facing the city, especially the growing divide between east and west. Geography has played a part in Melbourne’s superior population growth. It benefits from having its high-value jobs centre – its central business district – at the heart of the city. Sydney’s CBD is located in the far east of the metropolitan area, a long way from fast-growing residential areas to the west. Melbourne’s CBD has also been able to expand more easily than Sydney’s, which is constrained by its harbour setting. While Sydney’s CBD maintains its traditional dominance in high-value industries, especially financial and professional services, Melbourne is catching up. Back in 2001-02, the economic output of Sydney’s CBD was 45 per cent larger than Melbourne’s, but modelling by consultancy firm PwC shows that gap had narrowed to about 16 per cent by last financial year.

The share of national income generated from Sydney’s knowledge-based industries peaked at over 40 per cent in 2000 but has been in gradual decline since. Meanwhile, Melbourne’s share has been on the rise since the mid-2000s. Superior planning in Melbourne has also helped boost its population. It has managed to build far more houses than Sydney for a considerable period. Not only is Melbourne’s housing cheaper on average than in Sydney, it tends to be more accessible to major job centres. For example, a much bigger proportion of Melburnians can access their CBD within 45 minutes than can Sydneysiders. In cities across the world, fast-growing, high-value knowledge industries are bunching together in fewer, prime locations, especially near city centres. This pattern of jobs distribution is very acute in Sydney – employment growth has been strong in some locations, especially in and around the CBD, but very weak in western Sydney. A growing number of people in the city’s west have been forced into long, inefficient commutes to work on overstretched transport infrastructure. This has become a major drag on the city’s economy and threatens to hamper population growth. “Sydney will have to accept it’s going to be overtaken by Melbourne or do something about its core pressures,” the Committee for Sydney’s Tim Williams said. “The future of Sydney will be determined in its west.”

Because of Melbourne’s natural advantages, Sydney needs astute planning and management if it is to hold off the challenge from its southern counterpart. A lot depends on making jobs more accessible to those living in the west. Improved public transport links will be crucial – we’ve got no hope of matching Melbourne without it. A draft report by the Committee for Sydney, released on Tuesday, said infrastructure development in Sydney was hampered by the nature of the tax system. It called for a review of how Sydney and other big cities access federal infrastructure funding. If Sydney is to thrive, a much bigger proportion of high-value private sector jobs are needed in centres like Parramatta, Penrith and Liverpool. A Barangaroo-scale development near Parramatta would help – only 17 per cent of Sydney's banking, finance and business services jobs are located the city’s west. The case for locating more jobs in western Sydney is often made on the basis of equity. But it’s more than that. Reducing the economic divide between east and west has become fundamental to the success of the whole city. Matt Wade is economics correspondent.

@MattWadeSMH Ross Gittins is on leave.