DIVERSITY COSTS: NEW STUDY INDICATES THAT ECONOMIC REALITIES CAN EXPLAIN WORKPLACE BIAS

ROCHESTER, N. Y., October 2, 1997. While previous studies have identified discrimination, favoritism and legislative mandates such as affirmative action as factors that motivate hiring practices, a new study reveals that the primary issue affecting diversity in the workplace is the cost of doing business.

In "Economics, Demography and Communication," Stacey R. Kole, assistant professor of economics and management, and Glenn M. MacDonald, professor of economics and management, of the University of Rochester's William E. Simon Graduate School of Business Administration, detail how basing job assignments on personal characteristics can be understood from a purely economic perspective and not, as with most other examinations of workplace diversity, from a sociological model.

"Most people today are talking only about the benefits of diversity," says Kole. "It's easy to buy into that at a gut level. We wanted to acknowledge diversity's costs."

In the paper, Professors Kole and MacDonald argue that firms are motivated by standard economic incentives to match employees and customers who have something in common.

"Individuals with similar characteristics communicate at a lower cost," says MacDonald, in describing a central feature of the model. "People with similar characteristics may share common language, communication style, or life experiences that make it easier for them to exchange ideas," he says. "It is the 'invisible hand,' driving efficient communication, that often dictates hiring decisions."

The Simon study emphasizes the differences and similarities between employee and customer by assuming that demographic characteristics of the employee influence the cost of delivering goods and services to customers. From the firm's perspective, the delivery of these goods and services requires communication between the company and its customers -- be it in the form of direct sales or indirect interactions such as advertising or product design.

"By selecting employees whose characteristics mirror customer characteristics, communication is more efficient, and the company creates more value," MacDonald says.

In detailing this economic impact of diversity, Kole and MacDonald tested their model by examining the employment data -- broken down by gender and industry -- of 12 industrialized countries (including the United States) from 1965 to 1993. Taking into account the steady increase of women in the workplace and their increasing buying power in the economy, the model predicts that gender-based matching between employee and customer will grow, in particular, affecting the assignment of men and women to production jobs. In the data, there is a "remarkable uniformity in the patterns of employment" across all 12 economies that is consistent with the model's communication-based theory of diversity.

Kole and MacDonald conclude their paper by emphasizing that the proposed model and data analysis are the first of their kind. The authors suggest that a key objective for continued research should be the development of stronger data that could provide more detailed information on employee, firm and customer characteristics. But, according to Kole, "Variation in hiring practices across businesses is efficient, and government policy that mandates uniformity makes American businesses less competitive."

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Contact: Richard Franco, 212-752-8338

The Simon School is routinely ranked among the top 25 graduate business schools by U.S. News & World Report and Business Week. The School, recognized worldwide for its leading scholarship in education, employs a distinctive approach to business education because of its flexibility, innovation, youth, size, global outlook and vision.

EDITOR NOTE: Copies of "Economics, Demography and Communication" (FR97-06) are available upon request. Please call the Simon School's Office of Public Affairs at 716/275-3736; fax: 716/275-9331; e-mail: [email protected].

Information about the Simon School is also available on the World Wide Web at http://www.ssb.rochester.edu.

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