Does Labour Diversity Affect Firm Productivity

Using an employer-employee dataset, we analyse 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 labour 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 characterised by above-average trade openness, giving support to the hypothesis that an ethnically diverse workforce provides information and access to global markets.