Denying the pleasure of scrumptious downtowns? : evidence on economics of diversity in the US

Abstract

This paper investigates whether barriers to communication due to social diversity influence labour productivity across metropolitan areas in the United States. We contend that some forms of social diversity can increase the cost of communication and, thus, retard the diffusion and creation of productivity enhancing knowledge. We investigate this hypothesis using a panel dataset for three census years: 1980, 1990 and 2000, to estimate the economic impact of diversity on labour productivity (measured as average wage) across American cities. As part of the estimation we use three measures for diversity – racial, cultural or linguistic, along with a set of control variables including educational attainment, and demographic variables. Our initial findings indicate: one, racial diversity reduces labour productivity; two, linguistic diversity and cultural diversity enhance labour productivity, but barriers to communication mitigate the positive effects of linguistic diversity. The robustness of the ordinary least-squares results is supported by Instrumental Variable Estimation to account for potentially endogenous variables. Overall, the results provide insights regarding ‘state-sponsored’ multiculturalism and the economic impacts of social capital.