Urban Immigrant Diversity and Inclusive Institutions

Recent studies identify a robust positive correlation between the productivity of urban workers and the presence of a diverse range of immigrants in their midst. Seeking to better understand this relationship, this article tests the hypothesis that the rewards from immigrant diversity will be higher in metropolitan areas that feature more inclusive social and economic institutions. Institutions ought to matter because they regulate transaction costs, which, in principle, determine whether or not diversity offers advantages or disadvantages. We exploit longitudinal linked employer–employee data for the United States to test this idea, and we triangulate across two measures that differently capture the inclusiveness of urban institutions. Findings offer support for the hypothesis. In cities with low levels of inclusive institutions, the benefits of diversity are modest and in some cases nonexistent; in cities with high levels of inclusive institutions, the benefits of immigrant diversity are positive, significant, and substantial. We also find that weakly inclusive institutions hurt natives considerably more than foreign-born workers. These results confirm the economic significance of immigrant diversity, while suggesting the importance of local social and economic institutions.