Amid heightened attention on growing geographic inequality, various OECD member countries have re-oriented their regional development policies towards a place-based approach to foster spatially inclusive economic development. In supporting this objective, the OECD Regional Development Policy Committee (RDPC) has highlighted the need for timely, accurate and informative territorial indicators in order to both design and monitor policies. Effective regional development policy not only requires subnational indicators for different territorial units such as regions, cities or rural areas, but also entails the recognition of economic linkages that exist between different territories. In particular, local labour markets extend beyond administrative borders and create functional linkages across areas. With respect to a functional definition of space, most OECD countries have focused their work on larger cities and their surrounding area of economic influence by establishing the concept of functional urban areas. However, functional areas such as integrated local labour markets exist across a country’s entire national territory. Extending this concept to non‑urban areas can help policy makers analyse subnational developments and design spatial policies that are better targeted to intermediate and rural areas.

Effective policy design requires sound statistical evidence on socioeconomic trends. For regional policy makers, such evidence needs to reveal information on differences in socioeconomic outcomes across space. Therefore, having granular data and indicators on relevant geographies is of paramount importance to regional policy. In order to design, implement and monitor effective regional development policy, it is crucial that such policy addresses the right geographic scale.

This chapter provides the rationale for delineating functional areas in all territories, not only in urban areas but also in rural areas. It explains how functional geographies can complement administrative geographies. It discusses how functional areas can enrich the collection and computation of territorial statistics. Finally, it illustrates the potential benefits of the concept of functional areas for regional policy.

This chapter outlines the main approaches used for identifying functional areas in OECD countries. It discusses both core-based as well as multidirectional-flow-based approaches and lays out their most important elements. The chapter also presents key challenges of those approaches in terms of data availability, geographic building blocks, and sensitivity analysis of results.

This chapter presents the results of a survey of the OECD Working Party for Territorial Indicators on the existence of predominant concepts of functional areas in OECD countries. The chapter discusses the current experience of OECD countries and gives and overview of the policy relevance of functional areas. Furthermore, the chapter provides more detailed examples and explanations of six cases where functional areas have become a vital tool for statistical and policy purposes.

This chapter presents the methodology used to delineate functional areas in all types of territories based on multidirectional-flow data. It explains the underlying algorithms and discusses the importance of parameter selection for the results obtained by the method. The chapter provides a number of methodological guidelines that will help OECD countries to apply the concept of functional areas in their entire national territory.

This chapter uses the method for delineating functional areas explained and discussed in Chapter 4. It applies the method in five OECD countries that so far have no fully established functional area geography for their entire national territory. The chapter presents the application results for each country. Additionally, the chapter illustrates how non-traditional data sources such as mobile phone data can help identify functional linkages between different areas.

Economic, territorial linkages are an important factor in both statisticians’ and regional development policy makers’ work and decisions. In considering the connection between different areas and their economic and social interdependence, policy makers can target policies at the right geographic scale that takes into account such interconnectedness. The concept of functional areas, or local labour market areas, offers exactly this consideration of territorial linkages by identifying close labour market links, through commuting flows, between different geographic units and different types of settlements.