An economic perspective on diversity within organizations

Abstract

This paper summarizes the theoretical and empirical research in economics on the impact of employee diversity on organizational performance, where diversity is predominantly viewed through the lens of gender and ethnicity/nationality. The literature has studied this topic through two types of interactions: horizontal interactions between workers who are peers and vertical interactions between managers and workers. The theory of horizontal interactions highlights the conditions under which diversity is beneficial, such as when different groups bring complementary knowledge, but also when it is costly, as in the case of intergroup communication frictions. The theory of vertical interactions focuses on discrimination against different social groups due to the hierarchical nature of these interactions. Discrimination can result from preferences that favor or disfavor certain groups, or from imperfect information and the use of beliefs about group productivity to infer individual productivity. For both horizontal and vertical interactions, the empirical findings on the impact of diversity are mixed, with varying effects on organizational performance, ranging from positive to negative to no impact. Although this may suggest the field has little to say on the subject, the impact of diversity is often in line with the theoretical predictions. This suggests that for organizations to reap the potential rewards from diversity, they must consider how their context relates to the theory and act accordingly.