Why is diversity desirable in society?

Ethnic Diversity and Labor Market Success

Flexibility potential in heterogeneous labor markets and their economic policy implications

Ethnic diversity and labor market success

Journal for Labor Market Researchvolume 44, pages 81-89 (2011) Cite this article

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The economic potential of ethnic and cultural diversity is often misunderstood. The results of more recent studies, which are summarized in this article, show, however, that “soft” factors such as attitudes, perceptions and identities, in particular ethnic identities, can have a significant impact on economic results. This emerges both from analyzes of the process of cultural integration from a cross-generational perspective and from studies of job search and the reintegration of the unemployed into the labor market. An economy can do better economically through appropriate consideration and inclusion of multi-ethnic factors. Cultural and ethnic assimilation of immigrants is therefore not the sole or dominant strategy of economically successful integration into the host society. In addition to better activation of the integration potential of people with a migration background, it also makes sense to open up local people to culture or ethnicity.


The economic potential of ethnic and cultural diversity is often underestimated. This paper summarizes a number of recent studies which show that “soft” factors such as attitudes, perceptions and identities — and in particular ethnic identities — significantly affect economic outcomes. More specifically, the studies analyze the process of cultural integration over migrant generations as well as the process of job search and labor market reintegration of the unemployed. The economy can thus gain productivity and efficiency by recognizing and incorporating such multi-ethnic factors. Cultural assimilation that goes along with a loss of migrants ’own cultural heritage does not appear to be the sole or dominant strategy of an economically successful integration. To tap the full potential of ethnic and cultural diversity, an increased cultural and ethnic open-mindedness of the native population is desirable.


From an economic point of view, ethnic and cultural diversity represent the basis for a potential for economic success and prosperity that is often overlooked. In an increasingly globalized society with a high degree of division of labor, the ethnic human capital of immigrants is an economically valuable factor that can promote economic dynamism and creativity (cf. Alesina and La Ferrara 2005). Ethnic diversity and cultural diversity are, however, often the starting point for fear of economic repression and feelings of foreign infiltration in social discussions. The often poor economic performance of migrants, which ostensibly speaks against the expansion of immigration, also appears problematic.

This critical discussion is problematic because it gives immigrants the feeling that they are not welcome in the destination country, which can inhibit their willingness to integrate. In addition to the fundamental question of the advantages of immigration for an economy, the question of to what extent and to what extent the ties or identification of immigrants with the home and host countries themselves are an important factor for the economic success of the migrants and those involved Countries is. The process of adaptation and integration that immigrants go through after their arrival in the country of destination, and with it their factual multi-ethnic identity, makes a not inconsiderable contribution to shaping the effects of ethnic diversity on economic development and the success of the labor market.

Immigrants are typically first compared to locals. For Europe, these comparisons show that the average labor market success of immigrants lags behind that of natives (cf. inter alia Kahanec and Zaiceva 2009; Kahanec and Zimmermann 2010). The reasons for this are varied: They range from an inadequate human capital endowment (Kalter and Granato 2007) to a lack of language skills and discrimination (Dustmann and Fabbri 2003; Kaas and Manger 2010) to market segments specific to immigrants that offer lower incomes and opportunities for advancement (Heath and Li 2008). Still, immigrants undoubtedly have special skills that locals do not have. The activation of these often complementary qualifications (e.g. problem-solving skills and approaches, creativity or the ability to adapt, see Ottaviano and Peri 2006) is the central prerequisite for the economy and society to benefit from immigration for the benefit of greater prosperity overall. Previous research suggests that ethnic identitiesFootnote 1 are of central importance here. It also shows that multiple ethnic identities cannot be an obstacle, but rather a guarantee of economic success.

Building on this, the aim of the research activities within the framework of the project “Ethnic Diversity and Labor Market Success” is to expand the empirical analysis of ethnic identity as a determinant of economic success to mainly two sets of questions: On the one hand, the question of how the process of cultural integration develops from a cross-generational perspective is investigated and what effects can be seen on the economic success of the second generation of immigrants. The project is based on the proven data material of the Socio-Economic Panel (SOEP) of DIW Berlin, which has already formed the basis for many studies on the economic consequences of ethnic diversity (Constant et al. 2009c; Constant and Zimmermann 2008, 2009). On the other hand, the IZA evaluation data set (Caliendo et al. 2010) offers the possibility of expanding the analysis of ethnic identity to include aspects of job search and the reintegration of the unemployed into the labor market. Both topic complexes deal with central, but still largely unexplored questions in the German context.

The integration of people born in Germany with a migrant background, the so-called second generation, is becoming increasingly politically and economically relevant. Today, a third of the children up to the age of five have a migration background (Rühl 2009), which shows the future importance of this group for the German labor market. With regard to integration policy, the degree to which they experience equal education and opportunities is perhaps the most important success indicator. If one considers economic outcome variables, such as educational level and labor market success, however, one finds in Germany a constant disadvantage of both generations of immigrants compared to the natives (see Algan et al. 2010). The expectation that this disadvantage will be reduced from the first to the second generation of immigrants is therefore not confirmed. The economic integration of the second generation does not seem to be successful.

The question therefore arises whether this is (also) due to a lack of cultural integration or a deviant, non-converging ethnic identity. The studies described below, which are devoted to answering this complex of questions, use the Socio-Economic Panel (SOEP), a representative repeat survey of private households in Germany. The SOEP has been carried out on behalf of DIW Berlin for 25 years and currently includes the largest repeat survey of foreigners living in Germany. In particular, households with heads of household of Turkish, Spanish, Italian, Greek and former Yugoslav origin are disproportionately represented. The data provide information on questions about income, employment, education or health. Issues specific to immigration include, among other things, aspects of language use, contact with locals and identification with German culture or that of the home country.

The IZA evaluation data set is used to analyze the effects of ethnic identity on aspects of job search and the reintegration of the unemployed into the labor market (Caliendo et al. 2010). This new data set consists of two pillars: administrative data from the Federal Employment Agency and survey data from the IZA. The following studies are based on a survey of around 18,000 people who registered as unemployed between June 2007 and May 2008. One of the many advantages of the data set is that the individuals were interviewed very soon after they entered unemployment. Further interviews take place one year and three years later. In addition, the spectrum of questions includes a large number of topics that are still very rarely surveyed in such surveys, but whose influence on economic outcome variables is increasingly becoming the focus of attention. This applies to personality traits, attitudes and cognitive abilities, for example. In addition, detailed information on the migration background and ethnic identity is collected. The IZA evaluation data set offers the opportunity to study the influence of this extensive range of questions from the special point of view of job search and the reintegration of the unemployed into the labor market.

In the following, the central results and implications of our project are presented, which examines the effects of the cultural integration process of people with a migration background in Germany on their success in the labor market. First, the current state of research and the underlying concept of ethnic identity are presented. Findings with regard to the intergenerational integration process are discussed below, before the following section deals in more detail with the effects of ethnic identity on the job search process. The article closes with a conclusion and an outlook.

Current state of research and measurement of ethnic identity

In their handbook article, Constant and Zimmermann (2011) record key research results of previous migration research. They show that in addition to ethnicity or ethnic origin, “soft” factors such as attitudes, perceptions and identities as influencing factors for the economic success of immigrants are gaining increasing interest within recent economic research.Footnote 2 In previous empirical research, such factors have shown themselves to be of a factually exogenous nature for the economic process, i.e. they seem to influence economic decisions to a far greater extent than they are themselves influenced by economic factors (Constant and Zimmermann 2008). It also shows that ethnic identity and labor market success are mainly related to access to working life, while no significant correlation between ethnic identity and individual income could be demonstrated (Constant and Zimmermann 2009).

It also becomes clear that the pursuit of complete assimilation of immigrants cannot be justified solely on the basis of economic rationality. Complete assimilation is practically impossible, especially for first-generation immigrants. Assimilation and integration are therefore mainly to be understood as cross-generational processes. In addition, it is precisely their differences or the fact that immigrants have the characteristics required in the destination country, which is why immigration makes sense and comes about. Eliminating these differences would also eliminate the advantages that are triggered or at least promoted by cultural diversity (cf. Bellini et al. 2009; Audretsch et al. 2008). The finding that assimilation and integration positively influence economic outcome variables while the effects of separation and marginalization are negative supports this view.Footnote 3 An integrated, i.e. multi-ethnic identity does not seem to be an obstacle to economic success, but rather it is desirable with regard to the successful integration of immigrants into the labor market.

Constant and Zimmermann (2011) argue that demographic change and globalization will inevitably lead to increased global labor market-oriented migration flows and greater ethnic diversity at the national level. Understanding the formation of multi-ethnic identities and the interplay of cultural tradition, diversity and their perception within different population groups is therefore of the highest economic and, in particular, political relevance.

The integration process of immigrants in Germany can be illustrated by the degree to which identification with the host country increases. Upon arrival in the country of destination, immigrants are confronted with social and cultural norms that differ from the culture of their home country. In the new homeland, this also has a potential impact on the original sense of belonging to the country of origin. In extreme cases, the identification with the original culture is completely abandoned or a connection to the culture and society of the host country is completely absent. In between, further gradations in identifying immigrants are conceivable. Overall, the following states can be distinguished (cf. Constant et al. 2009a):

  • Assimilation: strong ties to the host country with only weak ties to the country of origin;

  • Integration: strong identification with the culture and society of the host country while at the same time showing a strong sense of belonging to the country of origin;

  • Separation: identification exclusively with the original culture;

  • Marginalization: no ties, neither to the culture of the host country nor to that of the country of origin.

Similarly, locals can go through a process of rediscovering their own ethnic identity when faced with other cultures. This can be understood as a degree of cultural openness that is becoming more and more important economically, politically and socially in a globalized world. It becomes clear that from a long-term and historical perspective, culture itself is in principle not a static or fixed structure, but rather develops with the inclusion of elements from other cultures. Assimilation therefore means - radically thought through to the end - first of all giving up one's own ethnic identity in favor of a fixed ethnic identity in the host country. In the long term, however, integrated migrants, i.e. those who have also preserved the culture of their home country, will bring their cultural achievements to the culture of the host country. So what was and is German is changing over the long term. In this project, however, we limit ourselves to short-term adaptation processes and leave the question of the dynamic development of “culture” open.

Ethnic Identity: Between Assimilation, Integration and Diversity

Constant et al. (2011) examine the cultural integration process of immigrants in Germany in more detail.Footnote 4 In addition to a comparison with the native population, immigrants of the first and second generation are also compared with one another.Footnote 5 Indicators that they use to analyze the various integration processes include not only marital status, language skills, ethnic identification and religiosity, but also factors such as life satisfaction, risk aversion and political interest. Overall, it can be seen that there are substantial differences between immigrants and natives as well as between the two generations of immigrants with regard to their integration, which are also significantly different according to origin and gender.Footnote 6

Second-generation immigrants show greater cultural, socio-economic and political integration into German society compared to their parents' generation, which indicates a successful intergenerational integration process. For example, the later generations no longer differ significantly from the German majority population in terms of marriage behavior and fertility, while the first generation of migrants still shows clear differences in this regard.Footnote 7 Second-generation women tend to be more linguistically adapted than men. Women of Greek and Turkish origin in particular are more cautious with regard to interethnic marriage behavior than men of these groups of origin.

With regard to the indicators “ethnic identification” and “political interest”, immigrants of Polish and Russian origin show a comparatively high level of integration. This is possibly due to the high proportion of ethnic German immigrants in these groups of origin. Overall, the findings for Turkish immigrants are not very encouraging because they show the lowest level of integration of all ethnic immigrant groups in Germany, especially in the area of ​​language skills and ethnic identification. Nevertheless, a positive trend towards greater adjustment over time can also be seen for this group.

In terms of cultural integration, there is therefore an overall positive trend over time and across generations of immigrants. Regardless of this, both generations have a persistent disadvantage compared to natives in Germany with regard to economic outcome variables (cf. Algan et al. 2010).

The study by Schüller (2010) goes further into the question of how the identification of immigrant families with their home or host country is reflected in the intergenerational process of parental investment in education. In Germany, children with a migration background often take lower levels of education and are overrepresented in secondary schools (see also Riphahn 2005). This can mainly be explained by the fundamental differences in the socio-economic family background between children with and without a migration background (Krause et al. 2010).

However, there could be differences within the immigrant population. Schüller (2010) examines whether parents who are better integrated into German society or who maintain a strong bond with the culture of their country of origin can more or less successfully promote their children's school success. If one assumes that parents allow their cultural identity to flow into their child-rearing process (Bisin and Verdier 2001), there is a theoretical connection between the degree of parental identification with the host country or country of origin and the educational success of their offspring.

In order to empirically examine this connection, the study looks at the first educational transition of children with a migration background in the German school system from primary school to secondary schools. Empirical estimatesFootnote 8 show that both dimensions of parental identity - attachment to the country of origin and identification with German society - are positively related to the likelihood of pursuing a higher level of education. It is the mothers whose turn to the host country is significant, while with regard to the fathers the relatively stronger attachment to the home country has a significantly positive effect.Footnote 9 This could indicate that cultural integration of migrants is desirable with regard to the economic success of future generations with a migration background, whereby maintaining a bond with the country of origin does not have to be a hindrance - on the contrary, it can also be beneficial to economic integration.

Ethnic diversity in the search process

Further research has analyzed the job search process of first and second generation immigrants in comparison with local residents. This process is an important economic mechanism for individual labor market success, the relevance of which has increased and continues to grow: Broken employment histories have long shaped the reality on the German labor market, normal employment is on the decline and atypical employment is experiencing an upswing (cf. Eichhorst et al . 2010). Against this background, at least short periods of unemployment and job search are more the rule than the exception. This also increases the relevance of the question of the extent to which people with a migration background and locals differ in this regard: If there are significant differences in this regard, the design of active labor market policy, for example, can (and should) take them into account.

The study of the job search process in Constant et al. (2009b) that ethnic identity and the degree of integration play an essential role in this context. The results make it clear that strategies for early intervention after entering unemployment should particularly target the group of segregated immigrants. This group is identified as the one with particular difficulties in the search process or in reintegration into regular employment. Comparatively high reservation wages seem to play an important role here.

For this reason, these studies are published in Constant et al. (2010a) expanded to include a closer look at reservation wages. This shows that different reference groups can lead to different aspirational wages. Assuming that first-generation immigrants orient their reservation wages to a greater extent on their country of origin or on immigrants from this country, and that second-generation immigrants and locals base their claims primarily or exclusively on the wage level in Germany for the latter groups ceteris paribus higher reservation wages.Footnote 10 This hypothesis can be confirmed empirically: For the second generation of immigrants, there are significantly higher reservation wages, which are around 3.5 percent higher in comparison with immigrants of the first generation, even if checks are made for observable characteristics. A Blinder-Oaxaca decomposition also indicates that the second generation expects higher wages for the same characteristics. Among other things, this affects the expected returns on education.

Constant et al. (2010b) analyze preferences and attitudes of unemployed native and second generation immigrants. Risk preferences, time preferences, trust and reciprocity are examined. More recent research results show that such factors are reflected in economic outcome variables and have a significant influence on them (see e.g. Borghans et al. 2008). Among other things, such characteristics also affect the job search process. Knowing about any differences in this regard between the groups of people under consideration can therefore be extremely helpful, for example when it comes to adequately shaping labor market policy interventions. The study shows significant differences between unemployed natives and second-generation immigrants with regard to their risk preferences and the degree of positive reciprocity. The latter measures the degree to which a person is willing to respond positively to generous, fair, or friendly behavior. Even after a short time of looking for a job, the lower risk aversion of people with a migration background explains, at least in part, the lower reintegration probability of this group compared to the local population. One possible mechanism that causes this effect is higher reservation wages, which result for people who are more willing to take risks (cf. Pannenberg 2010).

Conclusion and outlook

The studies presented here show that ethnic identity has a lasting effect, i.e. over generations, on economic outcome variables. They also provide initial insights into the effects on educational success and the reservation wages of the second generation.

First of all, it can be stated that the process of cultural integration of immigrants in Germany, measured in generations, within all ethnic immigrant groups takes place. For example, in terms of marriage and fertility behavior, risk aversion or political interests, children born in Germany hardly differ from the native population. This cultural rapprochement is more or less clear - depending on the cultural distance - for individual groups of immigrants. However, the overall positive cross-generational trend is evident for each individual group.

The results of the studies presented in this article also confirm that “soft” factors such as attitudes, perceptions and ethnic identities have a significant impact on economic outcome variables. It can also be shown that this is a sustainable process that extends and affects generations. The identification of immigrant families with both the country of destination and the country of origin seems to be important for the educational success of the next generation. A high degree of solidarity with the ethnic group is by no means an obstacle to education, on the contrary, it can be conducive to educational success. However, mothers in particular should be supported in their efforts to integrate, since strategies to support their children outside of school (e.g. supervision of homework or contact with teachers) can thereby become more efficient. The precise mechanisms by which parental ethnic identities influence the educational success of the next generation must remain an open question at this point in time.

In the job search process, the reservation wage in particular appears to be a decision variable influenced by reference groups and risk preferences, which also differ between the immigrant generations and in comparison with locals. Against the background that the job search process will probably continue to gain in importance in the future, this in turn has economic policy implications. There are, for example, promising starting points for a corresponding orientation of active labor market policy, such as special measures for the group of job seekers with low risk aversion (e.g. monitoring of their search efforts). Further studies that examine the search channels used and the search efforts undertaken by the unemployed can provide answers to questions that have not yet been answered. Informal search channels through ethnic networks, families and friends have proven to be successful. However, they make extensive use of social networks, which can differ significantly between immigrants and natives, but also within the group of immigrants. It can also be assumed that ethnic identities have a positive effect in this context.

Ethnic diversity harbors substantial economic potential for the economic success of individuals, which has so far not been understood and exploited enough. The point is not that there is a colorful coexistence of different cultures and ways of life and that immigrants and locals do not approach each other. This understanding of a multicultural approach is long out of date and incompatible with the concept of integration.

Previous research results as well as the results of the project show that cultural diversity in the form of a relatively stronger ethnic identity does not hinder economic success on an individual level, but on the contrary can have positive effects. The majority society should therefore not demand that immigrants assimilate themselves; rather, the ethnically-specific human capital of immigrants should be recognized as an asset and an advantage. This assumes that locals and immigrants approach one another. So it's about immersing yourself in both cultures - that of the home and host country - and developing a mutual understanding.

This was exemplified by the German national team at the Soccer World Cup in South Africa in 2010: the ethnic diversity of the players selected initially resulted in an extremely attractive product. Nevertheless, it was possible to achieve a high level of national identification between the team and the nation with the team. National identity is compatible with ethnic diversity in the nation. This also applies to the economy, which, however, must succeed in making better use of the natural advantages of a multi-ethnically integrated society for its production processes.

Executive summary

Whereas the social and labor market integration of ethnic minorities is recognized as a major challenge in many Western European countries, the economic potential of cultural diversity is often underestimated. Previous research has documented the central role of attitudes, perceptions, and in particular ethnic identity in this context. Against this background, the present article summarizes a number of recent studies which extend this line of research in two important aspects. First, the question is addressed whether immigrants ’cultural integration has a long-term effect on economic outcomes of subsequent generations. Specifically, the group of second generation migrants is more and more a concern, both from an academic and a policy perspective. In the course of the past century, many Western European countries have accumulated sizeable stocks of migrants and their descendants. Although one would expect migrant-native differences in economic outcomes to decrease substantially or even vanish from one generation to the next, this is not necessarily the case. Second, the process of job search is analyzed by incorporating concepts of ethnic identity and by distinguishing between first and second generation migrants. Since employment biographies become more unstable and fragmented, and labor markets in general more flexible, the importance of job search efficiency increases. However, there may be crucial differences in the job search behavior between first and second generation migrants, which in turn might be related to their ethnic identification. One major finding of the studies discussed in this paper is that ethnic identity has a persistent effect on economic outcomes, i.e., the effect of ethnic identity materializes over migrant generations. Other important findings can be summarized as follows. First, a process of cultural integration over migrant generations occurs for all ethnic minority groups in Germany. There are for example no major differences between natives and second generation migrants with regard to marriage decisions, fertility, or political interests. However, the intergenerational process of cultural integration appears to be somewhat slower for particular ethnic groups with an a priori higher cultural distance from the majority culture in the host country. Second, parental ethnic identity matters for the educational outcomes of second generation migrants. The identification of their parents with both the host country and the country of origin has an effect on immigrant children’s educational success. Interestingly, a rather strong identification with the country of origin does not appear to be an obstacle for a successful educational career. However, mothers ’integration efforts with the host country should be encouraged. The results generally point at the supposition that for immigrant children, growing up in integrated, rather than separated or assimilated families might be conductive for educational success. Third, in particular reservation wages of unemployed immigrant job seekers appear to be influenced by reference groups and risk preferences, which moreover differ between migrant generations and also in comparison with natives. These findings offer interesting perspectives, e.g., with regard to the design and targeting of active labor market policy. It may for example be reasonable to specifically focus on less risk averse individuals with measures such as job search requirements and monitoring, which potentially lower the expectations and reservation wages of those unemployed individuals. Overall, the economy can gain productivity and efficiency by recognizing and incorporating multiethnic factors. Cultural assimilation that goes along with a loss of migrants ’own cultural heritage does not appear to be the sole or dominant strategy of an economically successful integration. In contrast, ethnic human capital may even represent an interesting complementary factor that can be beneficial for economic success. To tap the full potential of ethnic and cultural diversity, an increased cultural and ethnic open-mindedness of the migrant as well as the native population is desirable.


  1. 1.

    Akerlof and Kranton (2000) define identity in the context of economic theory as a person's individual self-image ("a person’s sense of self"). Individuals derive great benefit from behavior corresponding to this self-image, which is why the choice of identity can influence economic decisions to a considerable extent. Ethnic identity is the part of the self-concept that results from the knowledge of group membership and its emotional value (Tajifel 1981).

  2. 2.

    This growing interest is documented, for example, by special editions of the Journal of Population Economics (Volume 20, Issue 3, 2007), des International Journal of Manpower (Volume 30, Issue 1–2, 2009), Research in Labor Economics (Volume 29, 2009) or recently The Economic Journal (Volume 120, Issue 542).

  3. 3.

    A more detailed explanation of the four states of immigrant identity formation mentioned here can be found further down in this text.

  4. 4.

    For this purpose, you use the SOEP for the years 2005 to 2007.

  5. 5.