The Heterogeneous Effects of Workforce Diversity on Productivity, Wages, and Profits

• Date: 01 July 2014
• DOI: http://doi.org/10.1111/irel.12064
• Author: Stephan Kampelmann,François Rycx,Andrea Garnero
• Published date: 01 July 2014

The Heterogeneous Effects of Workforce

Diversity on Productivity, Wages, and Profits

*

ANDREA GARNERO, STEPHAN KAMPELMANN, and

FRANC

ßOIS RYCX

We estimate the impact of workforce diversity on productivity, wages, and

productivity–wage gaps (i.e., profits) using detailed Belgian linked employer–

employee panel data. Findings show that educational (age) diversity is beneficial

(harmful) for firm productivity and wages. While gender diversity is found to

generate significant gains in high-tech/knowledge-intensive sectors, the opposite

result is obtained in more traditional industries. Estimates neither vary substan-

tially with firm size nor point to sizeable productivity–wage gaps except for age

diversity.

Introduction

EFFICIENT MANAGEMENT OF HUMAN RESOURCES (HR) IS A KEY ISSUE FOR FIRMS’

economic success. It does not only consist of dealing appropriately with single

workers’demands, bureaucratic procedures, or institutional settings. Properly

managing HR also (and perhaps mostly) implies finding the right workforce

mix and making the most of workers’skills. A diverse workforce, with respect

to education, experience, or physical stamina, is often needed due to the vari-

ety of tasks that have to be performed within firms. Labor diversity may also

* The authors’affiliations are, respectively, ENS, Paris School of Economics, Paris, France and SBS-EM

(CEB, DULBEA), Brussels, Belgium Email: agarnero@ulb.ac.be; Universit

e Libre de Bruxelles and SBS-

EM (CEB, DULBEA), Brussels, Belgium Email: stephan.kampelmann@ulb.ac.be; Universit

e Libre de Brux-

elles, SBS-EM (CEB, DULBEA), Brussels, Belgium and IZA, Bonn, Germany Email: frycx@ulb.ac.be.

The authors would like to thank Statistics Belgium for providing access to the data. They are grateful to

Mahmood Ara

€

ı, Philippe Askenazy, Andrew Clark, Jeremy Dawson, Patricia Garcia-Prieto, Pekka Ilmakun-

nas, Luca Marcolin, Sile O’Dorchai, Dario Pozzoli, Ilan Tojerow, the editor, and two anonymous referees,

as well as audiences in Brussels (ULB), Paris (PSE and Paris I), Caserta (AIEL), Nuremberg (IAB), Leuven

(Day for Labour Economists), Buch am Ammersee (IZA Summer School), and Turin (EALE) for helpful

comments and discussions. Funding for this research was provided by the Belgian Federal Government–SPP

Politique scientifique, programme “Soci

et

e et Avenir,”Employment, wage discrimination and poverty,

research contract TA/00/046/EDIPO. All remaining errors are the authors’responsibility. Andrea Garnero

gratefully acknowledges financial support from CEPREMAP. The usual disclaimer applies.

INDUSTRIAL RELATIONS, Vol. 53, No. 3 (July 2014). ©2014 Regents of the University of California

Published by Wiley Periodicals, Inc., 350 Main Street, Malden, MA 02148, USA, and 9600 Garsington

Road, Oxford, OX4 2DQ, UK.

430

benefitfirm productivity if it fosters complementarities (e.g., between high-

and low-skilled workers), generates spillovers (e.g., knowledge transfers

between more and less experienced workers), makes the workplace more

enjoyable (e.g., educational/skills diversity could be appreciated by employ-

ees), or stimulates demand (e.g., customers may prefer companies that have a

diverse workforce).

1

The downside of diversity, however, is that it may lead to

misunderstandings, communication problems, personal conflicts, or negative

reactions from stakeholders, all of which can undermine performance (Akerlof

and Kranton 2000; Becker 1957; Choi 2007; Lazear 1999).

Today’s labor force is becoming more and more heterogeneous: aging,

migration, women’s increased labor participation, and technological change

are key drivers of this phenomenon (Ilmakunnas and Ilmakunnas 2011;

Kurtulus 2012; Parrotta, Pozzoli, and Pytlikova 2012a). Moreover, in many

countries companies are under legislative pressure to diversify their

workforce either through quotas or affirmative action. Workforce diversity

has thus become an essential business concern. Firms have to manage

diversity both internally (i.e., among management and staff) and externally

(i.e., by addressing the needs of diverse customers, suppliers, or contrac-

tors). As a result, an increasing number of firms employ a “diversity man-

ager”whose task is to ensure that diversity does not hamper productivity

but may contribute to attaining the firm’s objectives. From the workers’

point of view, labor diversity may also generate benefits or losses. The lat-

ter may be the result of a more (or less) enjoyable working environment,

but may also derive from a higher (or lower) wage. According to competi-

tive labor market theory, workers are paid at their marginal revenue prod-

ucts. Hence, if labor diversity affects productivity, it may also influence

workers’earnings.

The empirical evidence regarding the impact of labor diversity on productiv-

ity is very inconclusive and studies on wage effects are exceedingly rare (Il-

makunnas and Ilmakunnas 2011). Moreover, findings must often be interpreted

with caution because of methodological and/or data limitations. Only few

papers examine how specific work environments influence the diversity–

productivity nexus. This is problematic because the optimal degree of diversity

is likely to depend on the characteristics of the production unit, for instance

the knowledge-intensity and technological content of production (Arun and

Arun 2002; Parrotta, Pozzoli, and Pytlikova 2012b; Pull, Pferdmenges, and

1

In the HR literature, “diversity management”refers to policies and practices that seek to include people

within a workforce who are considered to be, in some way, different from those in the prevailing constitu-

ency. It usually refers to dimensions such as gender, age, sexual orientation, religion, ethnicity, social origin,

and physical appearance.

Heterogeneous Effects of Workforce Diversity / 431

Backes-Gellner 2012) or the size of the firm (Fiegenbaum and Karnani 1991;

Konrad and Linnehan 1995; Levy and Powell 1998; Rynes and Rosen 1995;

Stahl et al. 2010).

The aim of this paper is threefold. First, we put the relationship between

labor diversity (measured through education, age, and gender) and firm pro-

ductivity to an updated test, using detailed Belgian linked employer–employee

panel data for the years 1999–2006. These data offer several advantages. The

panel covers a large part of the private sector, provides accurate information

on average productivity (i.e., on the average value added per hour worked)

and allows us to control for a wide range of worker and firm characteristics. It

also enables us to compute various diversity indicators and to address impor-

tant methodological issues such as firm-level invariant heterogeneity and endo-

geneity (using both the generalized method of moments [GMM] and

Levinsohn and Petrin [2003] estimators). A second aim is to examine how the

benefits or losses of labor diversity are shared between workers and firms by

estimating the impact of diversity on mean hourly wages and productivity–

wage gaps (i.e., profits)

2

at the firm level. Finally, we investigate the link

between diversity and productivity in different work environments defined by

the technological and knowledge intensity (we use three complementary taxo-

nomies developed by Eurostat [2012] and by O’Mahony and van Ark [2003])

and firm size.

The remainder of this paper is organized as follows. A review of the litera-

ture is presented in the next section. The following two sections, respectively,

describe our methodology and data set. We then analyze the impact of work-

force diversity on productivity, wages, and productivity–wage gaps across

work environments and end with a discussion of the results and a conclusion.

Review of the Literature

Workforce diversity and firm productivity. There are different economic

forces underlying the relationship between workforce diversity and productiv-

ity. As highlighted by Alesina and La Ferrara (2005), these forces may derive

from: individual preferences (either people may attribute positive [negative]

utility to the well-being of members of their own group [of other groups] or

they may value diversity as a social good), individual strategies (even when

individuals have no taste for or against diversity, it may be more efficient,

notably in the presence of market imperfections, to interact preferably with

2

By definition, the gap between productivity and wages corresponds to the gross operation surplus (i.e.,

profits).

432 / GARNERO,KAMPELMANN,AND RYCX