L’Union Fait la Force? Evidence for Wage Discrimination in Firms with High Diversity

Measuring the economic impact of coworkers from different countries of origin sparked intense scrutiny in labor economics, albeit with an uncomfortable methodological limitation. Most attempts have involved metrics that eliminate most of the socially and economically relevant heterogeneity among different countries of origin, salient dimension of diversity and critical determinant of labor market outcomes of migrants. The typical examples of such metrics are diversity indicators that divide the firm’s workforce into binary categories such as blacks and whites, foreigners and natives, and non-Europeans and Europeans. We propose an entirely novel approach that constructs a firm-level aggregate measure of diversity that explicitly takes into account differences in socio-economic conditions of migrants’ countries of origin. To do so, we use the United Nations Development Programme’s Human Development Index (HDI), a standard harmonized measure of cross-country variations in levels of socio-economic development that is available for virtually all the countries in the world. By resorting to rich matched employer-employee panel data for Belgium, we use this new aggregate measure of firm-level diversity to estimate firm-level wage equations, which control for a wide range of observable and time-invariant unobservable factors, including variations in labor productivity between firms and within firms over time. The results seem to suggest that the majority of firms do not discriminate against foreigners. However, our findings show that firms with high diversity might broadly discriminate against them. The wage discrimination in high-diversity firms could be alleviated through a stronger presence of collective bargaining and efforts to de-cluster foreigners from low-HDI countries in these firms.