Working Paper Series in Economics and Institutions of Innovation,
Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies

Abstract: Our paper investigates how diversity of the labor force influences the rate of new firm formation and the performance of new firms in urban areas. A diversified labor force within the firm and in the external environment influences the formation, survival and growth of firms. We explore these issues with both aggregate data at the municipal level and individual data at the firm level for the years 1993-2010. We measure diversity using entropy measures that account for a wider range of differences than is typically used. Our empirical analysis finds a positive influence of diversity of the labor force on the rate of new firm formation at the municipal level. At the level of an individual firm, we find that the diversity of the firm’s labor force is positively associated with the survival and growth of new firms. Our results add to the literature on the workings of agglomeration economies through variations in human capital, information spillovers and innovation.

Keywords: Diversity; labor force; education; occupation; industry; new firms; formation; survival; growth

JEL-codes: C31; C33; L25; L26; R10

32 pages, December 9, 2013

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