Diversity boosts productivity in American cities

April 19, 2021
Diversity in cities leads to greater productivity. (AP Photo/Teresa Crawford)

Diversity in cities leads to greater productivity. (AP Photo/Teresa Crawford)

Casual interactions between people born in different countries help explain why diverse U.S. cities are more productive, according to new research.

The new Journal of Economic Geography paper shows that efforts to fight housing discrimination, extend better work opportunities to immigrants and encourage diverse neighborhoods may foster economic growth. 

"For anyone who's lived in a really diverse city that has people who are really different than themselves who they interact with — you draw a lot of inspiration from these interactions," said author Maximilian Buchholz, a Ph.D candidate at the University of Toronto's geography and planning department. "To most people, this is kind of intuitive." 

Decades of studies have shown that U.S. cities with higher proportions of foreign-born residents generally enjoy higher wages and are more productive. But while such "diversity spillover" effects are an accepted pattern, researchers have not established the precise mechanisms behind them, according to Buchholz. By the time his study came out in April, only a few studies had examined the question with less-than-conclusive results. 

"We know that across cities, diversity — the foreign-born population — is strongly associated with [higher] average wages and productivity," said Buchholz. "To me, it was a theoretically and empirically interesting question." 

To examine the question, Buchholz tested four potential mechanisms for the relationship between diversity and local economies. He used Census Bureau data — which included residents' gender, race, education and whether or not they were born in the U.S. — from 2011 and 2017 for 229 American metropolitan statistical areas.

One model measured "exposure effects," representing the casual, non-workplace interactions that occur in diverse neighborhoods. This mechanism was the most convincing explanation for the benefits of diversity, Buchholz said. 

"It's people who are really embedded in day-to-day interactions and have more opportunities for casual observations of people who might be different than themselves in ordinary parts of their lives," said Buchholz, who also has a master's in Latin American studies from the University of California, Los Angeles. "It seems to be in those places where diversity mostly drives increases in wages and productivity." 

The metropolitan areas with the highest integration of U.S.-born and non-U.S.-born people are three Texas cities — Laredo, McAllen and Brownsville.

Another potential mechanism explored by Buchholz was "interactive problem-solving," through which people from a variety of backgrounds theoretically approach problems in different ways, leading to greater creativity and innovation, which in turn boosts productivity. Buchholz's model found that this mechanism, which has also been documented on the firm level, had the greatest effect on productivity alongside "exposure effects." 

A third mechanism, "complementary task specialization," explored whether immigrants performing different tasks as native-born workers at the same company improved productivity. This had some effect, according to Buchholz, but was difficult to differentiate from the problem-solving mechanism within the model. 

"It's a little tricky to disentangle statistically or empirically from interactive problem-solving," he said. 

The cities with the most immigrant and native-born integration within occupations are New York City, Miami and Chicago. 

A fourth potential mechanism Buchholz considered was "niching effects," through which members of immigrant communities share knowledge about occupations within which they disproportionately work. For example, Mexican construction workers or Italian tailors could help each other be more productive by sharing niche information with each other, the researchers said. 

While this pattern likely occurs in some immigrant communities, Buchholz did not find any evidence for "niching effects" having an effect on productivity or wages in aggregate. 

Buchholz believes more research is needed to better understand the mechanisms he explored, particularly exposure effects. He said that an ideal future study would follow real-world workers over time and track their productivity as they move from more-diverse to less-diverse metro areas, or vice versa. He wonders if the productivity benefit of living in a diverse city would carry over when individuals move elsewhere. 

The paper also provides evidence that cities should fight housing discrimination and provide opportunities for immigrants who want to live in diverse communities. 

"When people want to live in integrated neighborhoods, they should be able to do so," Buchholz said. "There are probably big productivity benefits."

He added that the U.S. should be more accepting of foreign credentials such as college degrees and certificates. 

"Immigrants often face big barriers in terms of employment. Their foreign credentials won't count, for example, in the U.S.," he said. "The deskilling we do through not recognizing credentials is a big problem and that's hurting productivity." 

The paper, "Immigrant diversity, integration and worker productivity: Uncovering the mechanisms behind 'diversity spillover' effects," published April 3 in the Journal of Economic Geography, was authored by Maximilian Buchholz, University of Toronto. 

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