Scandinavian Working Papers in Economics

Working Papers,
University of Aarhus, Aarhus School of Business, Department of Economics

No 10-12: Does Labor Diversity Affect Firm Productivity?

Pierpaolo Parrotta (), Dario Pozzoli () and Mariola Pytlikova ()
Additional contact information
Pierpaolo Parrotta: Department of Economics, Aarhus School of Business, Postal: The Aarhus School of Business, Frichshuset Hermodsvej 22, 8230 Åbyhøj, Denmark
Dario Pozzoli: Department of Economics, Aarhus School of Business, Postal: The Aarhus School of Business, Frichshuset Hermodsvej 22, 8230 Åbyhøj, Denmark
Mariola Pytlikova: Department of Economics, Aarhus School of Business, Postal: The Aarhus School of Business, Frichshuset Hermodsvej 22, 8230 Åbyhøj, Denmark

Abstract: Using an employer-employee dataset, we analyze how diversity in cultural background, skills and demographic characteristics affects total factor productivity (TFP) of firms in Denmark. Implementing structural estimation of firms’ production function, we find evidence that labor diversity in skills/education significantly enhances firm performance as measured by firm TFP. Conversely, diversity in demographics and ethnicity brings mixed results – both dimensions of workforce diversity have either no or negative effects on firm TFP. Hence, it seems as if the negative effects, coming from communication and integration costs connected to a more demographically and culturally diverse workforce, counteract the positive effects of diversity on firm TFP, coming from creativity and knowledge spillovers. However, we find that ethnic diversity is valuable for firms operating in industries characterized by above-average trade openness, giving support to the hypothesis that an ethnically diverse workforce provides information and access to global markets.

Keywords: Labor diversity; skill complementarities; communication barriers; total factor productivity

JEL-codes: C23; J24; L20

52 pages, December 1, 2010

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