Economic Impacts of Cultural Diversity in the Netherlands: Productivity, Utility, and Sorting*

Abstract

This paper identifies the impact of cultural diversity on local economies, by explaining spatial disparities in wages and housing prices across Dutch cities using unique individual panel data of homeowners during the period 1999 and 2008. We distinguish between the effects of spatial sorting based on individual heterogeneity, interactions‐based productivity effects, and consumer amenities while controlling for interactions between the labor and housing market. In line with previous literature, we find a positive effect of cultural diversity on average housing prices. After controlling for spatial sorting, the effect of cultural diversity on housing prices is negative. The negative impact of cultural diversity on local housing markets is likely driven by a causal effect between the presence of immigrants and neighborhood quality that outweighs a positive effect of immigrant‐induced diversity in consumption goods.

Spillovers from immigrant diversity in cities

“…They find that birthplace diversity is positively and robustly correlated with both outcomes, which they interpret as signaling that diversity raises productivity. Similar tests in other advanced economies also detect a positive relationship (Nathan, 2011;Kemeny, 2012;Ager and Bru¨ckner, 2013;Bakens et al, 2013;Bellini et al, 2013;Longhi, 2013;Suedekum et al, 2014;Trax et al, 2015;Elias and Paradies, 2016). And yet these studies leave key issues unresolved, inhibiting our ability to make confident statements about the underlying relationship between diversity and productivity.…”

“…Trax et al (2015) leverage panel data on German plants, and find a positive and statistically significant relationship between total factor productivity and city-and plant-level cultural diversity. Bakens et al (2013) exploit an individual-level panel of wages and rents in Dutch cities, using a twostep process that first separates individual-, sector-and city-level contributions to wages and rents, and second identifies the importance of city diversity in shaping outcomes of interest. Although they demonstrate a positive correlation between diversity and wages, coefficients on diversity are mostly insignificant.…”

“…In order to generate high-quality evidence, we seek to overcome issues of nonrandom worker selection that are present in nearly all extant studies, addressing the possibility that highly productive workers are drawn to cities that are immigrant-diverse. In this regard, it responds to an open question about the importance of these sorting dynamics in measuring diversity spillovers: of the two known papers addressing this issue empirically, Bakens et al (2013) find that scant spillovers remain after accounting for sorting on unobservables in the Netherlands, whereas in the German context, Trax et al (2015) find a continuing positive association between regional cultural diversity and plant productivity. We do not yet know how selection dynamics might affect prior estimates produced for the USA, including seminal work by Ottaviano and Peri (2006).…”

Spillovers from Immigrant Diversity in Cities

“…They find that birthplace diversity is positively and robustly correlated with both wages and rents, indicating that diversity chiefly acts to raise productivity. Similar tests, in other advanced economies, across di↵erent time periods, and sometimes using various means of capturing amenities and productivity, similarly find a positive relationship suggesting that diversity has a positive influence on productivity (Nathan, 2011;Kemeny, 2012;Trax et al, 2012;Bellini et al, 2013;Bakens et al, 2013;Longhi, 2013;Ager and Brückner, 2013;Suedekum et al, 2014). 2 Despite this consistent story, unresolved issues remain.…”

“…Bakens et al (2013) exploits an individuallevel panel of wages and rents in Dutch cities, using a two step process first to separate individual-, sector-, and city-level contributions to wages and rents, and second to identify the importance of city diversity in the overall relationship between city-specific factors and wages. They find that observed and unobserved characteristics at the individual level account for most of the variation in wages and rents.…”