2. The impact of diversity: A review of the evidence
This chapter examines the evidence on the economic impact of diversity, which yields a rather complicated picture. Contrary to the often assumed, direct positive impact of diversity on business performance, research shows that at the firm level, the business case for diversity is not particularly strong. However, while the impact of diversity might be small, there is a strong economic argument against discrimination and non-inclusion based on the sizeable cost associated with it. Finally, the chapter notes ethical reasons for fostering a just and equitable labour market alongside the economic argument for diversity.
With increasingly diverse societies, there has been a strong interest in better understanding whether and how diversity affects economic outcomes. Findings of a survey of Human Resource professionals across a range of OECD countries (see Box 2.1 for more detail) also show that participating firms have become increasingly concerned with this topic; around two in three think that the topic of diversity management has become more important in their firm in the past five years.
There is a large, multi-disciplinary interest on the impact of diversity, including the field of management and HR, psychology and economics, including labour economics, trade and the political economy literature. Table 2.1 highlights the main channels proposed in the literature on how diversity could positively or negatively impact outcomes at a firm level or affect societies more broadly.
This chapter reviews studies that analyse the economic impact of diversity on the macro (country), meso (region) and micro (firm or team) levels, as diversity is likely to be relevant on all these levels but through different mechanisms and with different outcomes.1 In addition, it provides a short overview of the literature on how diversity may ‘spill over’ and impact social cohesion and preferences for redistribution.
Most studies discussed in this section discuss the impact of migrant diversity and gender, which reflects both the interest of the public debate as well as the focus of the literature. Where possible, other forms of diversity (notably age and educational background) are also included. The majority of these studies has focused on Western European and North American countries and looks at the micro level impact, i.e. on the level of firms, teams and executive boards.
Measuring diversity remains a challenge. On the one hand, this is due to data limitations (e.g. on ethnic diversity, see also Balestra and Fleischer (2018[2])), on the other hand, quantifying diversity is not an easy endeavour given the multiple groups any person belongs to (gender, ethnicity, age, religion etc.). Therefore, economic models of cultural diversity mostly focus on only one dimension.
Furthermore, assessing the economic impact is difficult for two main reasons. First, the potential impact of unobserved heterogeneity that may simultaneously influence the outcome variable and ethnic diversity at regional or firm levels is likely to bias the estimated effect sizes of diversity. Panel data fixed effects models, which often help accounting for unobserved heterogeneity, do not work for firm-level studies due to the small within-firm variation. Second, research that can identify causal links between diversity and economic outcomes, e.g. through instrumental variables (IV) estimation, is limited.
The OECD, together with the Paris Dauphine University and with the support of national HR Associations, conducted an online survey in 2017/18 to gather evidence on the experiences and views of HR professionals regarding diversity practices in their firms. The supporting HR Associations included the Australian HR Institute (AHRI), Chartered Professionals in Human Resources (CPHR, Canada) and Human Resources Professionals Association (HRPA, Canada), Association Nationale des DRH (ANDRH, France), Deutsche Gesellschaft für Personalführung (DGFP, Germany), Associazione Italiana per la Direzione del Personale (AIDP, Italy), HR Norge (Norway), Associação Portuguesa de Gestão das Pessoas (APG, Portugal) and Fundación para el Desarrollo de la Función de Recursos Humanos Fundipe (Spain).
The survey was shared by the country’s main national HR Association and in total around 2 400 HR professionals in eight OECD countries (Australia, Canada, France, Germany, Italy, Norway, Portugal and Spain) participated. Around 50% of respondents were from Canada, whereas the number of respondents was around 400 for Australia and between 100 and 150 for European OECD countries.
The survey asked whether companies had introduced diversity measures, and if so, what kind of approaches they had chosen and which groups they were targeting. In addition, respondents were asked about the motivation behind these policies, whether outcomes where monitored and evaluated, and what kind of obstacles they had experienced. Lastly, the survey included questions on what kind of support they would like to receive for implementing diversity policies in their firms and what areas of diversity policies should receive more attention in the future.
Considering that the survey was only sent to members of the respective HR Associations and that response rates were low overall, the findings do not provide a representative picture of HR managers or company practices in a given country. Survey findings should be interpreted as giving a first indication of how HR professionals who are likely to be rather open towards diversity view these issues. However, it is clear that more research in this field is needed given the current absence of representative, cross-national data.
Most studies consider either how the shares of foreign graduate students/inventors impact innovation in a given field or they construct a fractionalisation index based on country of birth or nationality, that gives an indication of the workforce’s diversity overall.2 Studies mostly consider patent applications or patents per capita as a proxy for innovation. Table 2.2 provides a snapshot of the studies discussed in the following.
One study on the country-level impact is provided by Chellaraj, Maskus and Mattoo (2008[3]), analysing the impact of the share of foreign graduate students on patent applications, patent grants and non-university patent grants in the United States from 1963-2001. They find a positive impact in the order of 4.5 percent, 6.8 percent and 5.0 percent, respectively for a 10 percent increase in the foreign graduate students as a percentage of total graduate students. Another study confirms a positive impact of foreign-born college graduates, post-college degree holders, and scientists and engineers in the United States. Particularly the last group is found to boost innovation considerably (Hunt and Gauthier-Loiselle, 2010[4]). At the level of US States, they estimate that a 1-percentage point increase in the share of foreign-born STEM college graduates in the overall graduate population boosts patents per capita by 9-18 percent.
In Europe, research has also found a positive relationship between innovation and the share of the foreign-born population on a regional level (Ozgen, Nijkamp and Poot, 2012[5]). In addition, the composition of migrants in terms of different countries of origin is found to be a more important driver for innovation than the regional population size of foreign-born. Another study including around 200 European regions suggests that the impact of migrant diversity on innovation is positive and shows an inverse U-shape relationship. This suggests that there may be an ‘optimal level’ of migrant diversity when it comes to innovation (Dohse and Gold, 2014[6]).
For Italy, however, one study has found a negative effect of migrant diversity. After distinguishing between low and high-skilled workers, the authors find a negative impact of low-skilled workers on patents; a 1-percentage point increase of low skilled immigrants leads to 0.2 percent decrease in innovation (Bratti and Conti, 2014[7]). For high-skilled migrant workers, their findings are not significant. They argue that this may reflect that immigrants’ skills and education often remains underutilised in the Italian labour market. For other countries, however, there is evidence that benefits of diversity for innovation are more apparent in sectors employing relatively more skilled immigrants (see for example Ozgen C, Nijkamp P and Poot (2013[8]) for the Netherlands and Brunow and Stockinger (2013[9]) for Germany).
Relatively few studies look at different elements of diversity. Research by McGuirk and Jordan (2012[10]) is a notable exception, exploring the link between innovation and diversity of educational background, migrant diversity and age diversity in Ireland. They find that diversity in education and nationality have a positive impact on product innovation for a firm. For process innovation, only diversity in nationality has a significant, negative impact. Age diversity is not found to have a significant impact.
Different results are found for Denmark, where age diversity is associated with a negative effect on innovation, which is defined as the introduction of a new product or service (Østergaard, Timmermans and Kristinsson, 2011[11]). More diversity in education and gender appears to boost innovation while the impact of migrant diversity is not significant. Parrotta, Pozzoli and Pytlikova (2014[12]) find for Denmark that diversity in educational background has no impact on patent applications, whereas diversity in country of origin among employees has a positive impact.
Research on firm performance has assessed how diversity in executive boards affects profitability, how performance within teams may change and how higher diversity within firms influences productivity and wages. Much of this literature therefore tests the underlying assumption that more diverse companies can make better decisions and products because women and minorities differ in their knowledge, experiences or management styles and therefore can bring new insights and perspectives.
Diversity in executive boards and its impact on profitability
Table 2.3 shows that most studies on board diversity suggest that the relation between board diversity and performance is not significant or only very weakly positive (for meta-studies on gender board diversity, see Post and Byron (2015[13]) and Pletzer et al. (2015[14]). For example, Post and Byron (2015[13]) assessed 140 studies in a meta-study and found that on average, having more female directors is positively related to returns on assets and returns on equity, but that the effect was very small. The average correlation was .05, i.e. gender board diversity explained around two-tenths of the 1% variance in company performance, while on other indicators, such as stock performance and shareholder returns, the effect was not statistically significant. Studies that have assessed the impact of changes in legislation, e.g. by looking at the impact of newly introduced gender quotas for boards, also tend to find that a subsequently higher share of women does not have a significant effect on firm performance (see for example Ferrari et al. (2016[15]) for Italy.
On the contrary, Adams and Ferreira (2009[16]) found that female directors had a significant effect on board inputs and firm outcomes in a sample of US firms. Female directors appear to have better attendance records than male directors and the attendance of male directors improves following the entry of female members in the board of directors. Furthermore, gender-diverse boards allocate more effort to monitoring, while CEO compensation is found to be more sensitive to stock performance. On average, however, more gender equal boards have a negative effect on corporate performance. The authors argue that this may be linked to too much board monitoring. They find that more gender equal boards have a beneficial effect in companies where shareholder rights are weak and more monitoring is thus beneficial, while the impact is negative for companies with strong shareholder rights. This shows that the relationship between more gender balanced boards and firm performance are complex and may impact different areas of performance differently.
Overall, however, the literature does not allow to make a strong business case; neither for nor against increasing the share of women in company boards. Carter et al. (2010[17]) present similar results for the impact of ethnic diversity in boards in the United States, which is found to have no significant impact on firm performance.
Why this is the case is difficult to determine. There is some evidence suggesting that a positive impact of more gender equal boards is stronger in countries where gender equality is generally higher (Post and Byron, 2015[13]). This can be seen as an indication that board diversity is more than a ‘numbers game’, but that the context and gender stereotypes matter, for example whether women or minorities on boards have a de facto equal standing when it comes to decision making. If they do not, and are there as a token gesture or simply to comply, perhaps reluctantly, with legislation, then their presence on a board is likely to have little impact. Moreover, much of the literature rests on the assumption that more diverse boards can make better decisions because women and minorities differ in their knowledge, experiences or management styles and therefore can bring new insights and perspectives. Particularly for board positions, however, members may be diverse on aspects such as gender or ethnicity, but in other aspects such as educational background, values or professional experiences they might be very similar, hence not always adding much in terms of new perspectives or novel ideas.
Diversity, firm productivity and team performance
Studies on how diversity affects productivity at the firm-level, using representative data are rare. Trax, Brunow and Suedekum (2015[18]) show for Germany that migrant diversity has a positive impact on firm productivity, particularly strongly within larger manufacturing plants and less so in service establishments, while the share of migrants, either at the firm level or in the region, has no effect. A similar study for Denmark finds small negative effects on productivity while gender and age are not found to have an impact (Parrotta, Pozzoli and Pytlikova, 2014[12]).
Much of the literature on team performance and diversity belongs to the field of social psychology and management studies and assesses how diverse teams operate at the firm level. Most of the studies are survey-based and usually focus only on specific, usually large firms. This means that findings are not representative of all sectors or even firms within that sector. However, given the breadth of studies in this area, findings can be interpreted as giving an indication on the impact of diversity on team performance.
A number of studies make a difference between ‘highly job-related diversity’, such as educational background, job position or function in the company, and diversity aspects that are ‘less job-related’, e.g. gender, ethnicity or age. Measurement of team performance includes multiple indicators, such as efficiency, creativity, innovation and productivity.
Findings are somewhat mixed, but impacts of gender, ethnicity or age diversity are found to be either very small or insignificant. Some meta-analyses find no significant impact of gender composition, ethnicity or age on team performance (Horwitz and Horwitz, 2007[19]; Schneid et al., 2016[20]), while others find negative, but very small impacts (Bell et al., 2011[21]; Joshi and Roh, 2009[22])3. Most studies do, however, find a positive relationship between team performance and having teams with different professional backgrounds and other task-related characteristics (Bell et al., 2011[21]; Horwitz and Horwitz, 2007[23]; Joshi and Roh, 2009[22]).
Overall, these findings from meta-analyses seem to suggest that team diversity in terms of gender, ethnicity or age do not matter much for team performance. However, there is some evidence that demonstrates the importance of situational settings by examining under what specific conditions diversity dynamics may unfold and how. Joshi and Roh (2009[22]) show in a more fine-grained analysis that contextual factors, such as type of industry and the relative share of women or ethnic minorities in these teams have a moderating impact on team performance. Accounting for these characteristics generally increases the size of the relationship between team performance and diversity and therefore partially explains the mixed results of individual studies. For example, Joshi and Roh (2009[22])find that higher shares of women and ethnic minorities have a small negative impact in majority male or white teams, but a positive impact when teams are more balanced. This may suggest that when women or ethnic minorities are perceived as ‘newcomers’ rather than ‘just another’ colleague, more intra-group conflict may arise or minorities may have difficulties in being heard and taken seriously. In addition, Gonzalez and Denisi (2009[24]) show that in different branches of a large US company the ‘diversity climate’, i.e. whether employees perceive their workplace as open towards diversity, has a positive impact on the branch’s performance. For France, there is also evidence that biased managers have a negative impact on how ethnic minorities perform on the job. When assigned to biased managers (measured by their outcomes in implicit association tests) in a French grocery store chain, ethnic minorities were found to be absent more often, spend less time at work, scan items more slowly and take more time between customers. This appears to be linked to biased managers interacting less with minorities, thereby leading minorities to exert less effort (Glover, Pallais and Pariente, 2017[25]).
Thus, organisational practices, diversity management and non-discrimination policies can be important levers to make the most of a diverse workforce. Gaining a better understanding on how contextual factors mediate the impact of diverse teams is therefore an important area for future research, but due to the limited availability of data on such micro-level aspects of team composition and management, these studies will most likely have to focus on individual firms rather than a representative sample.
Assessing the macro-economic impact of diversity is not straightforward. A priori, there are no strong reasons that population diversity itself would have a macro-economic effect.
Research on how population diversity affects macro-economic outcomes has largely focused on the impact of immigrant diversity and mostly find a positive impact for high-income countries. The majority of country-specific studies focuses on the United States.
A study on 195 countries shows that the diversity of immigrants is positively associated with economic prosperity, particularly so for skilled migrants in high-income countries; a one percentage point increase of the diversity of skilled migrants increases long-run economic output, measured by GDP per capita, by 2% (Alesina, Harnoss and Rapoport, 2016[26]). In addition, there is evidence for the United States that at the city level, diversity generally has no significant impact on wages for low-skilled jobs, but has a positive impact on wages in high-skilled, high-income jobs that demand complex problem-solving (Cooke and Kemeny, 2017[27]). Similarly, panel data on US states over the 1960-2010 period indicates that diversity among highly educated immigrants has positive impact on economic growth, whereas diversity among low-skilled migrants has a no effect (Docquier et al., 2018[28]). Results for Germany show a smaller effect, but similar pattern (Suedekum, Wolf and Blien, 2014[29]).
These findings point in the same direction as the literature focusing on the firm level, as they suggest that diversity is likely to have a stronger positive impact in high-skilled employment. Other studies show similar positive effects on GDP per capita, however effects are found to be stronger in low-income countries (see for example Bove and Elia (2017[30]).
Looking at regions within 12 EU countries,4 higher immigrant diversity is found to have a positive impact on the productivity and wages of natives. This relationship is even stronger in more densely populated areas, pointing to possible agglomeration effects, i.e. the benefits of firms and people located near to each other (Bellini et al., 2008[31]). Similar results are found for US cities (Ottaviano and Peri, 2006[32]).
Using historic data from 1870–1920 from the age of mass migration to the United States, Ager and Brückner (2013[33]) find that higher immigrant diversity is related to stronger economic development at the county level, whereas a stronger polarisation, i.e. few, but comparatively larger country of origin groups living in counties with a American-born majority, has the opposite effect.
There is a large literature that goes beyond the economic impact of diversity and seeks to assess how ethnic and immigrant diversity affects social cohesion and preferences for redistribution. Most of this literature focusing on OECD countries has addressed how diversity can affect trust, voting patterns, civic participation, preferences for redistribution and investment into public goods. Despite some contradictory findings, evidence generally points to a negative relationship between diversity and these indicators of social cohesion, although findings vary strongly across countries, level of analysis and the inclusion of moderating factors. Generally, the negative impact of ethnic diversity appears to be more pronounced in the United States than in European OECD countries (for an overview, see (Alesina and La Ferrara, 2005[34]; Montalvo and Reynal-Querol, 2014[35]; Dinesen and Sønderskov, 2017[36])).
However, the relationship between diversity and social cohesion is not clear-cut. The literature shows that a number of factors have a strong mediating impact; social exclusion and disadvantage, inequality, inter-group contact and social interactions as well as the role of governance and institutions are important explanatory factors. In other words, what drives an often-observed erosion of social cohesion is not diversity itself, but rather contextual factors related to socio-economic status, inequality and governance. For example, studies on social cohesion in neighbourhoods show that the key element for weak social cohesion is the low socio-economic status of a neighbourhood rather than its ethnic diversity (Letki, 2008[37]; Tolsma, van der Meer and Gesthuizen, 2009[38]; Laurence, 2017[39]). Another area of the literature looks specifically at the impact of inequality between groups on public goods provision and attitudes towards redistribution. On a country level, a study on 46 countries – mostly high-income countries and emerging economies – finds a strong negative relationship between the level of provision of public goods and inequality between ethnic groups measured as differences in mean incomes across groups. In addition, findings suggest that these economic differences actually lead to lower public goods provision, particularly in countries with weaker democratic structures (Baldwin and Huber, 2010[40]). Delhey and Newton (2005[41]) find that generalised social trust is not directly impacted by diversity, whereas it is negatively associated with income inequality.
Regarding attitudes towards social spending and redistribution, in EU countries, positive attitudes among native-born towards income redistribution decrease with higher immigrant diversity and a higher share of immigrants in the population (Alesina, Harnoss and Rapoport, 2014[42]). Overall, however, the effect is small; a 1-percentage point increase in the share of foreign-born lowers support for redistribution only by about 0.2 percent. In addition, this effect is even smaller when immigrants come from high-income countries and when native-born are highly educated. This indicates that attitudes towards redistribution are not primarily influenced by ethnic diversity, but rather by the socio-economic status of migrants and possibly an assumed dependence on social welfare benefits.
Furthermore, there is mounting evidence that social interactions between groups has a positive impact on social cohesion, and particularly, trust. Research on the United States and Canada show that white people living in diverse neighbourhoods are more trusting when they regularly talk to their neighbours (Stolle, Soroka and Johnston, 2008[43]). This highlights not only the role stereotypes play in eroding social cohesion, but also the importance of social interactions to overcome them. This is particularly likely in settings where people encounter each other as equals and as part of a routine or with a common goal, e.g. in the workplace or at school, as such interactions can help reduce anxiety and increase empathy (for an overview, see Pettigrew et al., (2011[44])).
Lastly, how diversity influences social cohesion hinges on the quality of governance structures and institutions. Studies have shown that good governance on a country and regional level increase generalised trust and render an otherwise negative impact of diversity insignificant (Murtin et al., 2018[45]; Delhey and Newton, 2005[41]). Similarly, Kemeny and Cooke (2017[46]) find that in cities with low levels of inclusive institutions, the benefits of diversity are modest or non-existent, whereas in cities with high levels of inclusive institutions, the benefits of immigrant diversity are significant and positive.
In the context of increasingly diverse populations, there is a clear interest in gauging the economic impact of diversity. The previous sections have shown that overall, the evidence on the economic impact of diversity yields a rather complicated picture. Contrary to the often assumed, direct positive impact of diversity on business performance, research shows that at the firm level, the business case for diversity is not particularly strong.
However, while the impact of diversity might be small, there is a strong economic argument against discrimination and non-inclusion based on the sizeable cost associated with it.
Quite evidently, the economic exclusion or inactivity of large population groups comes at a high cost, particularly against the backdrop of demographic change related to ageing populations and increasing shares of groups that have been traditionally disadvantaged in the labour market, such as people with disabilities, migrants and ethnic minorities. Some studies seek to quantify the cost of continuing non-inclusion of diverse populations. France, for example, could gain around EUR 150 billion, or 6.9% of the 2015 GDP, over 20 years (i.e. a 0.35% increase in GDP per year) from elevating employment rates of women, French-born with a migration background, residents of disadvantaged neighbourhoods and people with disabilities to the average employment level (Bon-Maury et al., 2016[47]). Similarly, if the gender gap in labour force participation across the OECD were to be reduced by 25% by 2025, this could add one percentage point to projected baseline GDP growth across the OECD over the period 2013-25, and almost 2.5 percentage points if gaps were halved (OECD, 2017[48]). While these estimates are not based on a general equilibrium model, i.e. taking into account how this may impact the behaviour of supply, demand and prices in the overall economy, it nevertheless demonstrates that there are substantial macroeconomic gains in increasing labour market inclusion.
Employers will increasingly feel the cost of discriminatory behaviour in the context of growing labour market shortages, as their competitiveness will suffer from irrational hiring preferences (Gary Becker, 1957). Indeed, a field testing study has found that compared to natives, candidates with a foreign sounding name are equally often invited to a job interview if they apply for occupations for which vacancies are difficult to fill (Baert, Cockx and Gheyle, 2015[49]). Similarly, an analysis of reports filed in the context of the Dutch diversity law Wet SAMEN finds that skilled labour market shortage impacts ethnic minority representation positively (Verbeek, 2012[50]).
The economic dimension, however, is not the justification upon which efforts to foster diverse workforces ultimately rest. Economic arguments can only serve to reinforce the obligation of ensuring the labour market inclusion of diverse groups rooted in the idea of promoting a society that is just and equitable, valuing diversity, providing equal opportunities to all its members, irrespective of their various characteristics.
Thus, while there might not be a clear-cut business case for diversity, there is a strong social justice obligation, as well as a business case to prevent discrimination and non-inclusion. This rationale is a logical consequence of talent being distributed equally among the population – to make the most of increasingly diverse workforces, businesses and policy makers must ensure that opportunity also is.
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Notes
← 1. Parts of this chapter are based on a background report on the economic impact of diversity, provided by Ceren Ozgen (Marie Sklodowska-Curie Fellow at the Department of Economics and the Institute for Research into Superdiversity (IRiS) at the University of Birmingham).
← 2. This index accounts both for the heterogeneity of a population as well as the size of different population groups. It measures the probability that two people who are randomly selected from a sample belong to different groups and is the inverse of the Herfindahl-Hirschmann index used in Chapter 3 to build a migrant diversity index.
← 3. Most studies considered in these meta-analyses were conducted in the US.
← 4. Austria, Belgium, Denmark, France, former Western Germany, Ireland, Italy, the Netherlands, Portugal, Spain, Sweden and the United Kingdom.
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