Effects of cultural diversity on individual establishments

Transcription

1 NORFACE MIGRATION Dscusson Paper No Effects of cultural dversty on ndvdual establshments Stephan Brunow and Uwe Blen

2 E ects of cultural dversty on ndvdual establshments Stephan Brunow, Uwe Blen y Insttute for Employment Research Regensburger Str Nuremberg / Germany Keywords: e ects of mmgraton, cultural dversty, employment, productvty, rm level Abstract Internatonal mmgraton a ects the degree of cultural dversty present n a labour force. Ths paper focuses on the consequences of mmgraton wth respect to the level of cultural dversty by estmatng employment functons for ndvdual establshments. The theory behnd the emprcal analyses s based on a turned around New Economc Geography model. The data bass used s a lnked employer employee data set generated by a fuson of the IAB Establshment Panel wth the Employment Statstcs of Germany, whch provdes very detaled nformaton about ndvdual workers and establshments. In the emprcal analyses t s shown that employment s lower when the degree of dversty s hgher, regardng the revenue of an ndvdual establshment as gven. From ths result t can be derved under the condtons of monopolstc competton (mplyng elastc product demand) that the establshment s able to occupy a relatvely large part of the market. Fnally ths mples relatvely hgh labour demand. stephan.brunow@ab.de; Tel. +49/911/ y uwe.blen@ab.de 1

3 1 Introducton The e ects of mmgraton on labour markets have been explored n many papers. Most studes have concentrated on employment and wages and relate mmgraton ows to these crucal varables. Recently, Ottavano and Per (2005, 2006) chose a d erent perspectve n two semnal papers. They related regonal labour market outcomes,.e. wages and employment, to the cultural dversty of the labour force. They were able to demonstrate for Amercan metropoltan areas that dversty s a producton amenty for a regon and therefore has favourable labour market e ects. Ths result s nterestng snce the developed natons show an ncreasngly heterogeneous labour force due to both legal and llegal mmgraton. A further ncrease can be expected n the future because of the changng demographc composton of the populaton and the shrnkng of the younger cohorts n many countres. It s therefore mportant to observe the e ects of ths heterogenety on socety and the economy. The fractonalzaton of the labour force may mply excessve transacton costs for communcaton and, n fact, lower productvty. It s mportant to see whether ths Babylon e ect prevals among people who are not able to understand each other. On the other hand workers wth d erent cultural backgrounds may possess complementary sklls and problem-solvng abltes. When these workers nteract, productvty may rse due to these complementartes or because of other forms of externaltes. If ths s true, heterogenety leads to new productve solutons. Ottavano and Per found for Amercan ctes that the latter e ect prevals. Ther results, however, cannot easly be transferred to other countres owng to the many nsttutonal and legal d erences. Immgraton tradtons and general atttudes towards mmgrants are very d erent. Some countres have a hstory of mmgraton and others have not. Studes about other countres are therefore most helpful to determne whether Ottavano and Per s results could be generalzed. There are some correspondng papers avalable at the moment. Suedekum, Wolf and Blen (2010) conducted research nto the German economy and also found favourable labour market e ects. Belln et al. (2008) used data on several European countres. Nebuhr (2010) related the regonal frequency of patents n Germany to cultural dversty and found a postve relatonshp. In ths paper we ntend to narrow the focus and dentfy the e ects of cultural dversty at the level of ndvdual establshments, whereas Ottavano and Per (and Suedekum et al.) looked at the regonal level. The advantage s that the lnk between the composton of the work force and a potental productve amenty can be studed more closely. Wth ths approach a turned around model of New Economc Geography can be appled drectly to derve the level of employment wthn ndvdual establshments. It s also possble to control for possble endogenous e ects n an e ectve way. 2

4 We are able to follow ths approach snce we can use very detaled nformaton n a lnked employeremployee data-set. The IAB Establshment Panel for Germany has the advantage of beng a representatve panel for a large economy whch has been surveyed n annual waves for over 16 years now. The data of ths panel are fused wth data from the employment statstcs provdng very detaled nformaton on the actve work force. Ths data bass reveals over 215 natonaltes, whch are used as proxes for the respectve cultural backgrounds. The research whch forms the background to the paper s part of the NORFACE research programme on mgraton (Mgrant Dversty and Regonal Dsparty n Europe MIDI-REDIE project). We gratefully acknowledge the many deas and comments we have receved n ths context. 2 Lterature and theoretcal model There are varous channels va whch cultural dversty a ects economc outcomes. Ottavano and Per dscuss two basc mechansms: dversty could be a consumpton amenty or a producton amenty of a regon. Startng wth the latter pont, cultural dversty could lead to a more dvers ed producton. A tolerant populaton could enjoy specalty restaurants and many d erent products avalable under the condtons of regonal dversty. Wth respect to the producton amenty mentoned n the ntroducton, the fragmentaton of the labour force can lead to new complementartes n the producton process. New varants of labour dvson can be explored and productvty ncreased. Besdes ths, dversty could matter n research actvtes. Brngng together people wth d erent cultural backgrounds could generate many nnovatve deas, whch could n turn ncrease productvty levels. As announced n the ntroducton we concentrate not on the regonal but on the establshment level. In our case t s therefore not of nterest whether a regon could o er a d erentated product to ts nhabtants. The case of the consumpton amenty could be excluded n our analyss. Whereas Ottavano and Per need the Roback (1982) model to dentfy the exact e ects of dversty, n our case the assumptons of ths model are not requred. These are rather strong, especally for the European case, snce complete and cost-free moblty of workers and captal are assumed n the Roback model. We ntend to measure drectly the e ects of dversty on labour demand va producton advantages by focusng on ndvdual establshments,.e. productve plants, whch represent the lowest level whch can be a ected by dversty n producton. At hgher levels one can not be sure whether the e ect of dversty s due to productvty gans of ndvdual establshments or because of externaltes emergng from aggregaton. In exstng emprcal lterature externalty measures add to the regresson equaton to control for Jacobs or Marshall-Arrow-Romer externaltes (see Glaeser et al. (1992) for the dent caton of ths 3

5 knd of externaltes). The ncluson of those measures n a model on rm level s possble as long as they n uence (total) factor productvty. However, factor productvty on plant level mght not necessarly change because of appearng externaltes at hgher levels of aggregaton when externaltes a ect other varables. For example, those factors are regonal wages or product demand whch are partally exogenous for an ndvdual rm. We therefore explctely control for the presence of externaltes, especally those derved by the New Economc Geography (agglomeraton and competton forces). As t wll be shown, agglomeraton and competton e ects n uence demand and do not a ect labour productvty. In the followng we outlne a new theoretcal model to show how cultural dversty n producton mght n uence the factor productvty of a sngle producton unt. We treat dversty n a way smlar to the one chosen by Ottavano and Per (2005). They regard dversty n analogy to agglomeraton forces. Before we turn to the e ect of cultural dversty n producton, we derve product demand based on household utlty maxmsaton to work out the mpact of externaltes. Ths helps to understand the e ect of regonal externaltes on an ndvdual rm and makes t possble to ntroduce addtonal (external) nstruments for partally endogenous varables. In contrast to Ottavano and Per (2005) we do not aggregate ndustres to a regonal producton functon snce we wsh to focus on the rm level. In ths respect, our model s more general. For smplcty we assume that rms customers are households. A representatve household n regon s spends ts money E s on a varety of consumables X s provded by sector. For smplcty we assume that utlty U s s of the Cobb-Douglas type. Each X s s a composte commodty of x n products of dstnct producers where N labels the mass of rms n that sector. The aggregaton of x n s done wth the ad of a CES -utlty functon wth a sector-spec c elastcty of substtuton > 1, U s = IY X s ; X s = XN n! (x s n) 1 1 : (1) We are nterested n the total demand of x n = P R s xs n, where xs n s the consumpton good n regon s of rm n whch could be located n any regon. All other thngs beng equal, utlty ncreases the more dverse the supply of products s, whch mples N rsng. Calculaton of the Marshallan demand of each regon and summng up across all regons gves the gross demand of a sngle rm, x n = (q n ) X R s rs E s P N ; (2) k (ps k )1 where p s k s the consumer prce n regon s rm k of sector. q n s the mll prce of the n th producer, rs are trade costs of the ceberg type. We can express demand n terms of revenue when we multply 4

6 both sdes of (2) by a rm s mll prce. Ths gves revenue = q n x n = (q n ) 1 R X s rs E s P = (q N n) 1 RMP (3) k (ps k )1 The sum term s called the real market potental (RMP ) of a sngle rm (see Head and Mayers (2004) for a dscusson). The nomnator refers to household expendture and ts regonal dstrbuton, whereas the denomnator s a measure of the prce level of the sector under consderaton n any regon s. Despte the assumpton that the CES ndex represents household utlty, the key mplcaton s that the RM P features agglomeraton and dsperson forces based on a mcroeconomc foundaton; see e.g. Reddng and Venables (2004). Thus, from equaton (3) t can be seen that wthn the revenue measure q n x n home market magntudes and competton e ects are mplctly controlled for. Usng a revenue proxy therefore automatcally controls for agglomeraton forces and (regonal) competton e ects. We should also bear n mnd that a rm s revenue s an endogenous varable dependng on expendture and the dstrbuton of rms. Now we focus on rms maxmsaton problem to provde ths quantty x n. Wth market clearng, the total output x n s produced under constant returns to scale wth respect to labour L n and captal K n. The workforce mght be culturally dverse, where s mn s the share of workers belongng to natonalty m and M n s the total number of natonaltes employed. In the followng we assume a Cobb-Douglas producton functon wth x n = K 1 n 0 L n(1 n ) " Mn X (s mn ) 1 m # =( 1) {z } DIV n = Kn 1 L n (1 n ) DIVn ; n 2 (0; 1) ; 1 C A where s the sector-spec c elastcty of labour substtuton. n and DIV n are varables that a ect labour productvty and are ntroduced n the followng. Suppose that all labour s of the same natonalty, mplyng s n = 1 and thus DIV n = 1. In the case of a heterogenous workforce, however, an addtonal postve e ect on output occurs. If there are more than one cultural groups employed, DIV n exceeds the value 1 and ncreases factor productvty. Ths n turn rases x n for a gven L n and K n. Conversely, a hgher degree of fragmentaton of the employed workforce needs less employment L n to produce a gven x n. From an emprcal pont of vew the DIV n term s hard to grasp because t contans an addtonal parameter wthn the sum. It s clear 5

7 however, that the more culturally dverse a workforce L n s, the hgher output s. For! 1, a postve mpact of dversty on output dsappears. Ottavano and Per (2005) ntroduce n wth the am of ncludng also a negatve e ect of dversty. n s restrcted between 0 and 1 and s an ncreasng functon of the number of cultures present. Up to same degree t works n the opposte drecton compared to DIV n. Due to language barrers, coordnaton and transacton cost gans of dversty could melt away such that the overall e ect of dversty gets lowered, nsgn cant or even negatve. Then, the hgher n s the lower s labour productvty and consequently the lower x n has to be, for a gven L n and K n. It s not clear whether rms know about the postve or negatve e ect of a culturally dverse workforce. If they dd know, then every rm would employ a culturally dverse workforce that maxmses the DIV n term and whch keeps n as small as possble. At ths stage of modellng we assume that a rm does not know about productvty gans and DIV n s a part of the (unobservable) factor productvty. We can mnmse costs wth respect to captal and labour. For a gven wage level w, a captal prce r and the unknown productvty e ect of cultural dversty we derve the condtonal demand functons L (r; w; Y n ; DIV n ) = K (r; w; Y n ; DIV n ) = r w w r 1 (1 ) DIV n x n ; and (1 ) DIV n x n : An ncrease n r rases employment because captal becomes relatvely more expensve. A rse n wages, on the other hand, lowers employment because labour becomes relatvely more expensve. Now focus on the e ect of dversty. The more dverse the hred workforce s, the lower employment s. The second e ect relates to captal nput. Furthermore, because of a dversty e ect, less captal s necessary to produce a gven output. The labour-captal relaton s, however, una ected by a culturally dverse workforce, snce the L=K rato depends only on relatve prces and parameters of the producton functon. If we now wrte a cumbersome 1 = P=P where P s the exogenous prce, and because P x n = revenue; we derve L n = 1 1 r 1 revenue (1 n ) DIVn n : w P n Takng the logarthm yelds ln L n = (1 ) ln + (1 ) ln r (1 ) ln w 1 ln DIV n ln (1 n ) + ln revenue n ln P n : 6

8 Ths equaton can be consdered n emprcal terms. The prce of a good produced by a sngle rm s unobservable, so ln P n s ncluded n the error term. Snce there are no data on captal and ts prce, ln r s also ncluded n the error term. Both varables are partally absorbed by a) the xed e ects transformaton and b) the ncluson of tme dummy varables. Then the emprcal model becomes ln L n = ln w + 2 ln DIV n + 3 ln (1 n ) + 4 ln revenue n + x n + u n + " (4) In the followng secton we ntroduce the data set and motvate further control varables x n. 3 Estmaton ssues and hypothess The data are taken from the German Establshment Hstory Panel (Betrebshstork-Panel - BHP) whch s generated from the Employment Statstcs and the representatve survey, the IAB Establshment Panel, both provded by the Insttute for Employment Research (IAB). The parameters of (4) are ndustry spec c and there are further regonal and rm-spec c e ects. For ths reason we conduct a xed-e ects transformaton at establshment level to elemnate these and other tme-constants varables. We apply an ndustry class caton on a 3 dgt level (wz93) and consder 215 dstnct ndustres. We only consder ndustres whch acheve revenues, so non-pro t organsatons, the publc and the nancal sectors are not taken nto consderaton. The dependent varable s an establshment s employed workforce. We use the average daly employment n full-tme equvalents n order to control for part-tme workers. The theoretcal model outlned above shows the mpact of cultural fragmentaton on the employment level. There, the DIV -measure relates to the labour dstrbuton between natonaltes and s mxed wth the total number of employed natonaltes. To measure the cultural background of an employee we use her or hs natonalty as a proxy as Suedekum et al (2010) do, whereas Ottavano and Per use language as a proxy. To capture the fragmentaton e ect we use two steps. Frst, we focus on the share of employed foregners, s foregn. Ths measure relates to the general presence of foregners and answers the queston of whether an ncrease of employed non-german ncreases or reduces employment. However, as outlned n the theoretcal dscusson, the dstrbuton between d erent cultures (respectvely natonaltes) wthn the workforce mght matter as well. For ths reason, the second varable used s the Her ndahl-hrschman ndex, de ned as DIV n = 1 XM n s 2 mn: (5) m 7

9 It s worth notng that the DIV n s zero for rms that only employ Germans. It rses the more natonaltes are employed and the more unformly dstrbuted the s mn are. Wth regards to content, t mght be that an ncrease n M n leads to negatve dversty e ects (such as the Babylon e ect). another varable ln M foregn n We therefore add to the model whch s the number of employed non-german natonaltes. The ndcator s zero when no or at least one non-german natonalty s employed. The BHP consders 215 dstnct foregn natonaltes, so the maxmum of M could theoretcally be 215. The data reveal that 95% of all rms employ 12 dstnct natonaltes and have a maxmum share of foregn employees of 22.3%. 50% of culturally dverse rms employ up to 4 d erent natonaltes. The regonal maxmum of represented non-german natonaltes s 199 (Berln) followed by Munch, Hamburg, Frankfurt and Cologne - Germany s bggest metropoltan ctes. The dversty problem can only be explored reasonably for a populaton ncludng foregners. The mpact of DIV n on employment s vsualsed n gure 1, employng at least one fulltme equvalent worker. The graph contans a lnear unvarate regresson between DIV n and ln L n. The upper part of the gure ncludes all cultural dverse establshments whereas the lower part consders the dversty for a gven number of foregn natonaltes. Here we only consder DIV n for up to sx employed non-german natonaltes. All gures clearly show a negatve trend, whch gves rst evdence that cultural dversty, and especally the dstrbuton over natonaltes, lowers total employment. However, these pctures do not account for the mpact of other varables and therefore multvarate regresson should be appled. Fgure 2 vsualses the dstrbuton of our dversty measure DIV n for all establshments employng at least 5 workers (n full tme equvalents). Note, that we restrct the gure and only consder DIV n less or equal to the 99th percentle for the left panel and drop the rst and last percentle n the rght panel. The left part of the gure clearly shows that hghly dverse establshments do not occure often, snce the dstrbuton exhbts a strong postve skew. Note, that 75% of all establshments employng non-germans exhbt a value of DIV n of less than However, the gure shows the dstrbuton of all rms. Therefore, n the rght part we vsualse the dstrbuton of DIV n after the xed-e ects (wthn) transformaton. The values are qute equal dstrbuted around zero. There s no pattern of dscrete jumps or steps as t mght occur consderng changes n a Her ndahl-hrschman ndex 1. To summarze, there s varaton of employed labour force wth respect to cultural dversty on an establshment level. Does ths varaton lead to productvty gans? Multple regresson s appled to separate the mpact of cultural dversty from other e ects whch n uence employment. We carry out further regressons n whch only cultural dverse establshments are consdered,.e. DIV n > 0. Ths s a smple check of the robustness of our ndngs. Fnally we control 1 A smlar pcture occurs for the rst-d erence operaton. 8

10 Fgure 1: Impact of Dversty on Employment for the potental problem of endogenety of the DIV n and ln M foregn n as nstruments. measures and use ts lagged values The ncluson of control varables can be derved n part from our theoretcal model. n the case of the real market potental, whch s approxmated by the establshment s revenue. Ths s so model suggests a postve e ect of revenues on total employment. As was mentoned n the theoretcal part, the revenue measure s endogenous and depends on competton and demand e ects. The For ths reason we nclude the populaton densty and the regonal sector-spec c establshment densty n logs as nstruments. Because we can observe all regonally establshed producton unts wth the BHP, we can access a rather low level of the ndustry class caton,.e. we consder the 3-dgt level. Both nstruments 9

11 Fgure 2: Dstrbuton of the dversty ndex are ncomplete measures for the nomnator and denomnator of the real market potental because they do not control for the sum across regons. We therefore addtonally ncorporate the tme lag of revenue as an nstrument, whch, however, leads to a loss of cases. We label the resultng model as IV and estmate t wth 2SLS. The wage rate s also an mportant varable from a theoretcal perspectve. We use the average daly wage per employee and expect a negatve sgn. The varable monopoly s a dummy ndcator and s set to unty when the establshment has no regonal compettor. Whereas revenue captures the demand sde and therefore already ncludes the potentally hgher demand due to the regonal monopoly stuaton, the monopoly varable captures productvty e ects. Because of a lack of competton a regonal monopoly could operate less e cently. We therefore expect a postve sgn. Another branch of lterature hghlghts postve productvty e ects appearng n exportng rms. Agan, for gven revenues an establshment faces nternatonal competton and has to be therefore relatve more productve. To capture ths e ect we add the export share to EU countres to the regresson model. The varable s labeled as s export EU. We expect a negatve sgn. We further control for the state of the technology and machnery. Wthn the IAB Establshment Panel ths nformaton s provded on an ordnal scale such that we use four dstnct dummy ndcators rangng 10

12 from state-of-the-art equpment to "out of date" equpment. As the reference category we chose the second best category of equpment age. There s also nformaton on whether parts of the establshment have been n- or outsourced. Ths drectly a ects the employment level and should therefore been controlled for. Another varables are the share of human captal s H, measured as the share of employees holdng a unversty degree and the share of women employed s women. The observaton perod of the panel coverts the perod from 1999 to 2008 wth yearly waves. Tme xed e ects are taken nto account usng dummy varables. Table 1 contans the estmaton results of a regresson of the establshment s employment n full-tme equvalents ln L n. The rst columns contan the baselne model not controllng for employed foregners. In the next three columns the regresson results are presented whch nclude the share of employed foregners s foregn and the log of the number of employed foregn natonaltes, ln Mn foregn. The last columns report the estmates where we consder the dversty of the workforce DIV n nstead of s foregn. Establshment-spec c e ects are controlled for n each of the blocks. Besdes xed e ects we also report random e ects estmates for the sake of completeness although the Hausman test rejects the valdty of the RE models. Another Hausman test based on non-robust standard errors ndcates that pure FE s nconsstent and an IV estmator performs better wth regard to the endogenous ln Mn foregn ; s foregn and DIV n measures and ln revenue. The Davdson-MacKnnon test of exogenety con rms ths result, whle obtanng a hghly sgn cant value for the FE model. It therefore also rejects the pure FE model n favour of the FE IV spec caton. Though the Sargan test rejects the valdty of the chosen nstruments, the Hansen s J-statstcs supports these consderng all establshments. Hansen s J test s robust aganst some msspec caton and heteroscedastcty and should therefore be prefered over the Sargan test. The IV estmates can be severly based f the chosen nstruments are weak. In that case the correlaton between nstruments and endogenous varables s weak. We follow the procedure suggested by Stock and Watson (2003, Ch. 10) and conclude that the nstruments have explanatory power and the estmates do not su er from the weak nstruments problem. Because the FE IV approach yelds consstent estmates compared to the FE and RE and RE IV models, ths model s the preferred one. The model selecton procedure holds for both models, the one that consders s foregn and the other one ncludng DIV n.

13 Table 1: Estmaton results of establshment employment Baselne Model Share of foregners Dversty of workforce ln Ln = FE FE IV RE IV FE FE IV RE IV FE FE IV RE IV ln w *** *** *** *** *** *** *** *** *** (0.015) (0.007) (0.006) (0.015) (0.015) (0.006) (0.015) (0.015) (0.006) ln revenue 0.279*** 0.556*** 0.781*** 0.264*** 0.529*** 0.699*** 0.264*** 0.530*** 0.698*** (0.009) (0.012) (0.003) (0.009) (0.022) (0.004) (0.009) (0.022) (0.004) monopoly *** 0.069*** *** *** (0.029) (0.021) (0.02) (0.029) (0.032) (0.019) (0.029) (0.032) (0.019) sh *** *** *** *** *** *** *** *** *** (0.092) (0.031) (0.027) (0.087) (0.079) (0.026) (0.087) (0.079) (0.026) swomen *** *** *** (0.015) (0.014) (0.012) (0.015) (0.017) (0.012) (0.015) (0.017) (0.012) sexport EU *** *** *** *** *** *** (0.023) (0.019) (0.02) (0.021) (0.024) (0.019) (0.021) (0.024) (0.019) ln M n foregn 0.305*** 0.346*** 0.398*** 0.305*** 0.359*** 0.420*** (0.019) (0.047) (0.012) (0.019) (0.049) (0.013) sforegn *** *** (0.065) (0.231) (0.086) DIV *** *** (0.049) (0.162) (0.068) state-of-the-art equpm (0.004) (0.004) (0.005) (0.004) (0.004) (0.004) (0.004) (0.004) (0.004) rather old equpm (0.003) (0.004) (0.004) (0.003) (0.004) (0.004) (0.003) (0.004) (0.004) oldest equpm (0.01) (0.009) (0.01) (0.01) (0.011) (0.009) (0.01) (0.011) (0.009) outsourcng (0.008) (0.007) (0.007) (0.008) (0.009) (0.007) (0.008) (0.009) (0.007) nsourcng (0.008) (0.008) (0.008) (0.008) (0.009) (0.009) (0.008) (0.009) (0.009) Tme Dummy s yes yes yes yes yes yes yes yes yes N No. groups Sargan Test ** 6.967** Hansen-J-Test wthn R between R overall R Corr(u, xb) rob. s.e. n () except for RE IV; * p<0.1; ** p<0.05; *** p<0.01; FE.. xed e ects, RE.. random e ects IV.. nstrumental varable estmaton by 2SLS; Balestra and Varadharajan-Krshnakumar estmator for RE nternal nstruments: lag of revenues, DIV, lnm and sforegner; external nstruments: populaton densty and establshment densty 12

14 Irrespectve of the estmaton strategy, the parameter estmates are jontly sgn cant, ndcatng the general explanatory power of the model. Before nterpretng the results concernng the man varables, s foregn, DIV n and ln Mn foregn, we look at the e ects of the controllng varables. In general, the results of the xed e ects (FE) models are farly smlar to those of the xed e ects nstrumental varable models (FE IV). As expected, the mpact of wages on employment s negatve. An establshment s revenue exhbts a postve sgn and a hghly sgn cant coe cent of An ncrease n demand results n the necessty to ncrease the workforce. The parameter s far from one because the sze e ect s partly taken out by the xed e ects ncluded n the model. Other emprcal studes based on the IAB Establshment Panel typcally use the share of women employed to address the ssue of part-tme jobs. Not surprsngly, our estmate of s women s nsgn cant because the explanatory varable s measured n full-tme equvalents. Thus, an e ect of part-tme jobs s already controlled for. The nsgn cant result also ndcates that women do not a ect productvty n any drecton compared to men. Establshments whch use relatvely more human captal have lower employment levels on average, gven the revenue level. Ths s due to the fact that better educated workers are more productve. It s somewhat surprsng that the state of equpment and machnery does not a ect employment levels. A test of the jont sgn cance of the equpment varables also yelds an nsgn cant p-value. Agan, ths mght be due to the fact that these varables show lttle varaton over tme and are therefore correlated wth the xed e ects. As was expected, a rm wth a regonal monopoly uses more labour n producton compared to others, cetarus parbus, ndcatng that monopoly stuatons lead to ne cent producton. However, the e ect s nsgn cant. Focussng on exportng establshments reveals that these rms are on average smaller to produce a gven amount. Ths e ect dsappears for the subsample of only cultural dverse establshments. Let us now turn to the dversty ssue. Frst, the e ect of the varable ln M foregn n s postve,.e. t s assocated wth hgher employment levels. Wthout any further control varables about the foregn workers employed, potentally unfavourable propertes of these workers are taken over by ths varable. Relatvely small proportons of hgher educaton as well as matchng problems wth regard to educaton (possbly acqured n a foregn country) play a role n ths respect. More work s requred for a gven level of revenues, as can be seen from the postve e ect of the number of employed natonaltes, whch s hghly sgn cant n the FE and FE IV models. Even more, a hgher level of employment s necessary f a further natonalty s ncluded to the exstng ones for gven revenues and wages. Snce we focus on the change of the number of employed natonaltes, ths negatve e ect can be nterpreted as Babylon-e ect. As was shown n the theoretcal part not only the absolute value of employed natonaltes matters but 13

15 also the dstrbuton of the workforce. Ths leads to the nterpretaton of s foregn and DIV n. Wthn the FE model the e ect of of both varables s nsgn cant. However, controllng for ther endogenety whle usng lagged values as nstruments gves a d erent pcture: n the FE IV model cultural dversty lowers total employment sgn cantly, whch s n lne wth the expectaton from the theoretcal model. The e ect exhbts a value of for DIV n and for s foregn. Thus, an ncrease n the share of employed foregners ncreases productvty. To set the focus on DIV n mples the concentraton on the dstrbuton of the workforce. Is t worth to employ a rather mxed workforce or to hre only workers from a spec c non-german natonalty? Followng Mn foregn, t would be better to employ only few d erent natonaltes. However, accordng to the underlyng approach, a more dverse workforce wth respect to ts dstrbuton yelds productvty gans. The estmate of DIV n s hghly sgn cant, ndcatng that a dstrbuton over natonaltes matters. The more equal the dstrbuton s, the lower s employment (and the hgher s productvty). Accordng to the model, the estmate of the dversty measure should be whereas the wage measure should be 1. Insofar, our estmates are only qualtatvely n lne wth the theory at rst sght. However, note that the DIV n only approxmates the theoretcal CES -ndex. Especally the exponent of the outer bracket s also ncluded n the estmated coe cent. The ndcator varables of cultural dversty should be consdered together because they relate to dfferent questons. For a gven number of employed natonaltes, a more unform dstrbuton between them s n favour of productvty gans. Addng a further natonalty, on the other hand, lowers productvty. However, one should be aware of nterpretng the result and conclude that the best strategy would be to employ only one foregn natonalty. As shown n gure 1, d erent employed natonaltes can acheve smlar combnatons between DIV n and ln L n. It s mportant to note, that n and DIV n are partly ndependent of each other. Especally for a gven number of natonaltes, represented by n, an ncrease of dversty wll ncrease productvty. How robust s ths result of cultural dversty? As was stated above, n the next step we restrct the sample and consder only establshments whch exhbt a value greater than zero for the dversty ndex (DIV n > 0). The reason for ths restrcton s that there mght be factors whch are not captured so far. Especally the decson of employng foregners or not mght n uence the results. The results obtaned for the restrcted populaton are shown n the regresson table 2 n the appendx. Though the sample sze and the number of establshments (groups) are reduced, the pcture obtaned for the full sample stll holds, wth d erences n detals. Interestngly, n the FE model of the smaller sample the s foregn and DIV n measure are already sgn cantly negatve. The IV estmate exhbts almost the same value as that n the unrestrcted model. The results obtaned on dversty are therefore con rmed. In the restrcted sample wages do not a ect employment to the same extent as before. There are 14

16 several explanatons for ths: rst, we now consder larger establshments. These are more lkely to have a works councl and t s more complcated for them to lay o employees. Second, larger rms typcally pay wages based on collectve agreements. The lterature on labour demand typcally argues that the recrutment decson of personnel s jontly determned wth the payment decson. Ths decson rases the suspcon of endogenety ssues of wages. We therefore nstrument wages as another robustness check. The estmates and sgn cances are not a ected ndcatng that the estmates of Table 1 do not su er from an endogenety bas. Thus, we can rely on the parsmonous model and the nterpretaton above. The e ect of employed human captal s also larger (n absolute terms) n the restrcted sample. Ths rst evdence supports the hypothess that the level of employment depends on cultural dversty. 4 Conclusons Ths paper focuses on employment levels dependng on a more or less culturally dverse workforce. Based on a producton functon we derve a small theoretcal model whch s close to those found n the New Economc Geography lterature. We use ths model to develop an emprcal approach whch enables us to dentfy the e ect of a culturally dverse workforce. The man advantage of our data s that they nclude nformaton about ndvdual rms. To avod problems of endogenety a 2SLS method s used. When a culturally dverse workforce s hred and there are productvty gans as a result of cultural nteracton, t s to be expected that relatvely less labour s needed. Ths hypothess s supported by estmatons based on the underlyng model. We employ German data at establshment level, because ths s the lowest level where a culturally dverse workforce could generate producton gans. It s una ected by possble e ects at a hgher level. We further control for market sze and competton e ects n uencng agglomeraton forces, whch are mplctly ncluded n revenues and thus also ntegrated nto our models. What are the conclusons concernng labour market e ects based on the results receved? At rst sght t seems as f dversty s bad for employment. Establshments wth a hgher degree of dversty are more productve; gven a spec c level of revenues ther employment level s lower. How s ths result compatble wth those obtaned by Ottavano and Per and Suedekum et al., who state that the productve amenty whch dversty represents for regons mples a hgher level of employment? The answer s smple: our analyss treats the level of revenues as gven and therefore concentrates on a productvty e ect. Under the condtons of monopolstc competton (whch we assume) rms operate n a market wth elastc product demand. As can be shown under general assumptons, hgher productvty s assocated wth hgher labour demand f the rms face an elastc product demand (Appelbaum and Schettkat 1999, 15

17 Cngano and Schvard 2004, Blen and Sanner 2006). There s a drect e ect of hgh productvty on labour demand, whch s the labour savng e ect. There s also a compensatng e ect that works n the opposte drecton, snce t s pro table for rms to lower ther prces to sell more, whch ncreases not only ther sales but also ther labour demand. Under the condton of elastc demand on the product market ths secondary e ect prevals. Therefore, the concluson s that dversty s assocated wth favourable labour market e ects. The results we obtan are n lne wth those of other lterature on dversty. We are able to show the emprcal mcrofoundatons of the papers operatng at a regonal level. 5 Lterature 1. Appelbaum, E., R. Schettkat (1999): Are Prces Unmportant?, Journal of Post-Keynesan Economcs 21, Belln, E., G.I.P. Ottavano, D. Pnell, G. Prarolo (2008): Cultural Dversty and Economc Performance: Evdence from European Regons, HWWI Research Paper Blen, U., H. Sanner (2006): Structural change and regonal employment dynamcs, IAB Dscusson Paper Cngano, F., F. Schvard (2004): Identfyng the Sources of Local Productvty Growth, Journal of the European Economc Assocaton 2/4, Combes, P.-P., T. Magnac, J.-M. Robn (2004): The dynamcs of local employment n France, Journal of Urban Economcs 56, Glaeser E.L., H. D. Kallal, J.A. Schenkman, A. Shlefer (1992): Growth n Ctes, Journal of Poltcal Economy 100 (6), Head K., T. Mayer (2004): The emprcs of agglomeraton and trade, In V. Henderson, J.-F. Thsse (eds.): Handbook of Regonal and Urban Economcs 4, Amsterdam. 8. Nebuhr, A. (2010): Mgraton and nnovaton: Does cultural dversty matter for regonal R&D actvty?, Papers n Regonal Scence 89, Ottavano and Per (2005): Ctes and cultures, Journal of Urban Economcs 58, Ottavano and Per (2006): The economc value of culture dversty: evdence from US ctes, Journal of Economc Geography 6,

18 11. Reddng S., A. Venables (2004). Economc geography and nternatonal nequalty, Journal of Internatonal Economcs 62, Roback, J. (1982): Wages, rents and the qualty of lve, Journal of Poltcal Economy 90, Stock, J.H., M.W. Watson (2003): Introducton to Econometrcs, Addson-Wesley, Boston. 14. Suedekum, J., K. Wolf, U. Blen (2010): Cultural Dversty and Local Labour Markets, IZA Dscusson Paper Seres, DP No A Appendx 17

19 Table 2: Estmaton results of establshment employment of only cultural dverse establshments Baselne Model Share of foregners Dversty of workforce ln Ln = FE FE IV RE IV FE FE IV RE IV FE FE IV RE IV ln w *** *** *** *** *** *** *** *** *** (0.029) (0.025) (0.011) (0.025) (0.013) (0.01) (0.024) (0.013) (0.01) ln revenue 0.212*** 0.432*** 0.691*** 0.174*** 0.332*** 0.493*** 0.169*** 0.323*** 0.454*** (0.013) (0.03) (0.005) (0.01) (0.017) (0.008) (0.01) (0.017) (0.008) monopoly (0.027) (0.023) (0.025) (0.024) (0.023) (0.022) (0.024) (0.022) (0.022) sh *** *** *** *** *** *** *** *** *** (0.262) (0.237) (0.055) (0.227) (0.067) (0.048) (0.215) (0.065) (0.046) swomen ** *** (0.023) (0.033) (0.021) (0.022) (0.021) (0.019) (0.02) (0.021) (0.019) sexport EU * * (0.023) (0.022) (0.02) (0.02) (0.017) (0.018) (0.019) (0.017) (0.018) ln M n foregn 0.274*** 0.400*** 0.500*** 0.331*** 0.459*** 0.607*** (0.015) (0.025) (0.014) (0.017) (0.026) (0.015) sforegn *** *** *** (0.12) (0.211) (0.092) DIVn *** *** *** (0.108) (0.159) (0.073) state-of-the-art equpm (0.005) (0.005) (0.006) (0.004) (0.005) (0.005) (0.004) (0.005) (0.005) rather old equpm ** 0.009* * 0.009* (0.004) (0.005) (0.005) (0.004) (0.005) (0.005) (0.004) (0.004) (0.005) oldest equpm * (0.012) (0.014) (0.013) (0.01) (0.011) (0.012) (0.01) (0.011) (0.012) outsourcng (0.008) (0.01) (0.008) (0.007) (0.007) (0.007) (0.007) (0.006) (0.007) nsourcng (0.008) (0.011) (0.009) (0.007) (0.008) (0.008) (0.007) (0.008) (0.008) Tme Dummy s yes yes yes yes yes yes yes yes yes N No. groups Sargan Test Hansen-J-Test wthn R between R overall R Corr(u, xb) rob. s.e. n () except for RE IV; * p<0.1; ** p<0.05; *** p<0.01; FE.. xed e ects, RE.. random e ects IV.. nstrumental varable estmaton by 2SLS; Balestra and Varadharajan-Krshnakumar estmator for RE nternal nstruments: lag of revenues, DIV, lnm and sforegner; external nstruments: populaton densty and establshment densty 18