Culturally diverse locations good for business

Nov 7, 2019

Between 1981 and 2013, the proportion of the adult population born overseas rose from 18 percent to 29 percent.

The increase in the foreign-born adult population was particularly strong in larger urban areas. In Auckland, the foreign-born population share rose from 28 percent in 1981 to 47 percent in 2013. The 2018 census data released to date suggest that this has continued to increase.

“We capture this change by measuring the probability that, in a meeting of two randomly selected individuals in the city, the two belong to different groups,” said Dr David Maré, Senior Fellow at Motu Economic and Public Policy Research and an author of the new paper on the economic impact of cultural diversity.

This measure rose from 49 percent to 74 percent over the course of the time we studied,” said Dr Maré.

The paper examines the impact of diversity on the attractiveness of cities to business and to residents. It focuses on birthplace diversity, but also looks at ethic and religious diversity.

The research finds birthplace diversity is good for quality of business and weakly negative for quality of life.
“Overall, the positive effect on quality of business more than balances the weak negative effect on quality of life, implying that diversity has a net positive effect on people’s wellbeing,” said Dr Maré.

If diversity increases by one standard deviation, wages will be 4 percent higher and rents 13 percent higher. This is the same effect on quality of business as a 47 percent increase in population.

However, the estimated effect of birthplace diversity on quality of life depends on the share of expenditure consumers spend on housing.

“If people are spending 30 percent of their income on housing, the estimates imply that diversity has no effect on quality of life. Given that housing accounts for a higher share of expenditure in Auckland than elsewhere, our main estimates probably overstate the negative effect on quality of life there,” said Dr Maré.

“Conversely, in areas where housing costs are low relative to incomes, we are probably understating the negative effect,” said Dr Maré.

If a city’s population is culturally polarised into two large groups (with all other groups combined having a small share of the population) the data shows that polarisation lowers productivity.

A copy of the research, Valuing cultural diversity of cities by Dave Maré and Jacques Poot and funded by the Ministry for Business, Innovation and Employment is available on the Motu website.

Summary Haiku:
In diverse cities,
wages and rents are higher.
Firms gain, folks less so.