The popular press often touts workforce demographic (e.g., ethnicity and age) diversity as profit enhancing. Diversity may reduce the firm’s communication costs with particular segments of customers or yield greater team problem solving abilities. On the other hand, diversity also may raise communication costs in teams thereby retarding problem-solving and diminishing productivity. Unfortunately, the effect of team diversity on productivity has not been studied formally and there is little empirical evidence concerning the impact of diversity on productivity. Diversity in ability enhances the team productivity if there is significant mutual learning and collaboration within the team, while demographic diversity is likely to harm productivity by making learning and peer pressure less effective and increasing team-member turnover. We evaluate these propositions using a novel panel data from a garment plant that shifted from individual piece rate to group piece rate production over three years. Because we observe individual productivity data, we are able to econometrically distinguish between the impacts of diversity in worker abilities and demographic diversity. Our results indicate that teams with more heterogeneous worker abilities are more productive. Holding the distribution of team ability constant, teams with greater diversity in age are less productive, and those composed only of one ethnicity (Hispanic workers in our case) are more productive, but the findings for team demographics are not robust to alternative model specifications. Finally, workers on all Hispanic teams are less likely to leave the team, even after accounting for team productivity, indicating some preference for segregation among these workers.
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