The Costs of Ethnic Diversity with Garett Jones

Garett Jones returns to the podcast to discuss the issue of ethnic diversity. There is a wide body of research showing that ethnic diversity can reduce the productivity of teams, firms, and even whole countries.

Williams and O’Reilly (1996) review dozens of studies showing that ethnic diversity has a negative impact on group performance. In the two decades since, more research has reinforced that result. Alesina and La Ferrara (2005) find that increasing ethnic diversity from 0 (only one ethnic group) to 1 (each individual is a different ethnicity) would reduce a country’s annual growth by 2 percent. Multiple studies (La Porta et al., 1999; Alesina et al., 2003; Habyarimana et al., 2007) have shown that ethnic diversity negatively affects public good provision. Stazyk et al. (2012) find that ethnic diversity reduces job satisfaction among government workers. Parrotta et al. (2014a) find that ethnic diversity is significantly and negatively correlated with firm productivity.

This may seem strange to you. If you’re like me, you probably enjoy diversity. You probably don’t observe the problems of low morale and high marginal costs that researchers have found in ethnically diverse workplaces.

If that’s the case then you, like me, live in a bubble. An apparent exception to the rule that ethnic diversity lowers productivity comes in high-human-capital groups. I say “apparent” because there hasn’t been much in the way of direct study of this particular issue. However, some results are suggestive. For instance, the same researchers who found that ethnic diversity reduces firm productivity in general found that it increases firms’ level of innovation as measured by patents (Parrotta et al., 2014b). Most of the people I know fall into this category of highly skilled, highly educated individuals, so it shouldn’t be surprising that my experience (and maybe yours) is not the norm.

Given that diversity is so costly for organizations, there is a huge industry dedicated to diversity training to mitigate these effects. However, a recent issue of the Harvard Business Review argues that diversity training seems to be a general failure.

To the extent that diversity is a plus for firm profitability, firms will tend to seize this opportunity without the need for legal intervention. And indeed, there are some types of diversity that seem to have positive impacts on firm profit. For instance, a recent study by Alesina, Harnoss, and Rapoport (2016) indicates that birthplace diversity improves productivity. This is different from (and in this sample, uncorrelated with) ethnic diversity. People might all share the same ethnicity, but the evidence indicates that if they come from different places they tend to have complimentary skills that make them better at working together.

As Garett points out, this is roughly the plot of every movie and TV show ever made by Joss Whedon.

The causes of all these effects have been studied by experimental economists. (For an overview of the history of experimental economics, listen to my interview with Erik Kimbrough.) One way to test this is to look at how ethnically diverse groups play various games. In a study looking at the different ethnicities in Israel, Fershtman and Gneezy (2001) found that people did not discriminate against Sephardic Jews in the dictator game but they did discriminate in the trust game, indicating that discrimination was driven by a (mistaken) lack of trust in the minority ethnicity. Surprisingly, even members of the minority tended to discriminate in this way.

Glaeser et al. (2000) found that pairs are less trustworthy when they have different ethnicities or nationalities. The really shocking thing about this is that this study was performed on Harvard undergraduates, who we might think of as the people least likely to discriminate in this way.

Easterly, Ritzen, and Woolcock (2006) show that ethnolinguistic fractionalization has a negative impact on the rule of law:

Fractionalization and the Rule of Law

The basic story that Easterly, Ritzen, and Woolcock tell is that ethnic conflict makes it difficult to achieve a consensus on how the government should be run, thus leading to worse government.

Works Cited

Alesina, A., Devleeschauwer, A., Easterly, W., Kurlat, S., & Wacziarg, R. (2003). Fractionalization. Journal of Economic growth, 8(2), 155-194.

Alesina, A., & Ferrara, E. L. (2005). Ethnic diversity and economic performance. Journal of economic literature, 43(3), 762-800.

Alesina, A., Harnoss, J., & Rapoport, H. (2016). Birthplace diversity and economic prosperity. Journal of Economic Growth, 21(2), 101-138.

Easterly, W., Ritzen, J., & Woolcock, M. (2006). Social cohesion, institutions, and growth. Economics & Politics, 18(2), 103-120.

Fershtman, C., & Gneezy, U. (2001). Discrimination in a segmented society: An experimental approach. Quarterly Journal of Economics, 351-377.

Glaeser, E. L., Laibson, D. I., Scheinkman, J. A., & Soutter, C. L. (2000). Measuring trust. Quarterly Journal of Economics, 811-846.

Habyarimana, J., Humphreys, M., Posner, D. N., & Weinstein, J. M. (2007). Why does ethnic diversity undermine public goods provision?. American Political Science Review, 101(04), 709-725.

La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. (1999). The quality of government. Journal of Law, Economics, and organization, 15(1), 222-279.

Parrotta, P., Pozzoli, D., & Pytlikova, M. (2014a). Labor diversity and firm productivity. European Economic Review, 66, 144-179.

Parrotta, P., Pozzoli, D., & Pytlikova, M. (2014b). The nexus between labor diversity and firm’s innovation. Journal of Population Economics, 27(2), 303-364.

Stazyk, E. C., Davis, R., & Liang, J. (2012). Examining the Links between Workforce Diversity, Organizational Goal Clarity, and Job Satisfaction. In APSA 2012 Annual Meeting Paper.

Williams, K. Y., & O’Reilly III, C. A. (1998). A review of 40 years of research. Res Organ Behav, 20, 77-140.

Other Links:

Pseudoerasmus on Hive Mind.

Sam Bowman on Brexit.

Tyler Cowen on backlash against immigration.

Slate on the original “welfare queen.”

A smart solution to the diversity dilemma.

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