When diversity hurts
‘Diverse People Unite’ is the motto on the South African coat of arms. Diversity is a great thing, we believe, because it exposes us to new peoples, new experiences and new ideas. But what if diversity also results in lower productivity? This is the uncomfortable result of a forthcoming paper in the Quarterly Journal of Economics, one of the foremost journals in the field. The paper, written by Jonas Hjort of Columbia Business School, provides evidence that suggests that ethnically diverse teams are less productive than ethnically homogeneous teams. Hjort writes:
A body of literature suggests that ethnic heterogeneity limits economic growth. This paper provides microeconometric evidence on the direct effect of ethnic divisions on productivity. In team production at a plant in Kenya, an upstream worker supplies and distributes flowers to two downstream workers who assemble them into bunches. The plant uses an essentially random rotation process to assign workers to positions, leading to three types of teams: (a) ethnically homogeneous teams, and teams in which (b) one, or (c) both downstream workers belong to a tribe in rivalry with the upstream worker’s tribe. I find strong evidence that upstream workers undersupply non-coethnic downstream workers (vertical discrimination) and shift flowers from non-coethnic to coethnic downstream workers (horizontal discrimination), at the cost of lower own pay and total output. A period of ethnic conflict following Kenya’s 2007 election led to a sharp increase in discrimination. In response, the plant began paying the two downstream workers for their combined output (team pay). This led to a modest output reduction in (a) and (c) teams – as predicted by standard incentive models – but an increase in output in (b) teams, and overall. Workers’ behavior before conflict, during conflict, and under team pay is predicted by a model of taste-based discrimination. My findings suggest that inter-ethnic rivalries lower allocative efficiency in the private sector, that the economic costs of ethnic diversity vary with the political environment, and that in high-cost environments firms are forced to adopt “second best” policies to limit discrimination distortions.
Pushed to the extreme, these findings suggest that, if South Africa’s businesses want to become more productive, then they should forget about the ‘Rainbow Nation’ and only employ people of the same ethnicity, i.e. Xhosas or Sothos or Afrikaners or Zulus. Businesses that opt for diverse teams will grow slower than businesses which employ only people from one ethnic group; in a profit-maximising, Darwinian world, the ethnically homogenous businesses will eventually win against the diverse but unproductive ones. Where businesses already employ different ethnicities, Hjort’s evidence suggests that it would be best to let those of the same ethnicity work together in teams instead of mixing team members across ethnicities. So much for ‘Diverse People Unite’!
Of course, things are not that simple, and it would be silly to conclude from this that diversity is evil. We should remember that most teams in the real world don’t assemble flowers into bunches; teams are often required to provide creative solutions to complex problems where innovative, out-of-the-box thinking is required. It seems reasonable to assume that ethnically diverse teams have a higher probability of dissimilar ideas than ethnically homogenous ones. In economics jargon, perhaps ethnically diverse teams are more prone to economies-of-scope rather than economies-of-scale. And a logical conclusion from Hjort’s work is that, were ethnic rivalries to disappear, the negative impact of diversity on productivity would all but disappear too.
But such results force us to stop and think about the untested assumptions we make. And it raises difficult questions too: even if our own labour and development economists find that diversity hurts our productivity, is there not a moral argument in favour of maintaining ethnically diverse teams? Given our history of forced racial segregation, how do we weight the ethics against the efficiency arguments? My expectation would be that some of the counter-productivity effects that Hjort finds will be mitigated over time by working with people from a different ethnic group, and that this in any event is the only way of addressing the issue at its core. As economists, we should understand the value in delaying instant productivity gains for even greater long-term benefits.