First glance

Diversity and inclusion aren’t just about equity, they’re about efficiency too

Adding more women to the workforce delivers a bigger GDP boost than simply employing more men

Publishing date
03 February 2025
Authors
Jonathan Ostry
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President Trump’s campaign against diversity, equity and inclusion (DEI) policies in the workplace in the United States represents a sea change from longstanding traditions of affirmative action dating back to the 1960s. It is also a major break from the last few years when large corporations in America spoke out in favour of DEI and enacted relevant corporate policies, following the murder of George Floyd in 2020. The Biden administration’s DEI policies were in symbiosis with those of the private sector, but such policies are now often derided as unfair, discriminatory, anti-meritocratic and even un-American, not just by politicians, but also by the corporate elite that championed them previously.

Economists look at the issue of workplace diversity and inclusion through a limited prism of economic efficiency and economic growth. Clearly, if discrimination means that some people who are able and willing to contribute to economic output are prevented from doing so, there is an economic cost. Remove the barriers to such workers and output will rise. By how much? If there is no inherent difference in the productivity of excluded and existing workers, the gain in GDP is simply average labour productivity times the number of excluded workers. This calculation underpins so-called ‘headcount’ exercises, which are often used to get a rough estimate of the economic benefit from more workforce inclusiveness.

Some DEI opponents may not agree with the premise of this argument, which is that discrimination exists. Other DEI opponents may agree that discrimination exists but disagree that it should be overcome by giving a preference to members of disadvantaged groups: they may argue that such efforts could result in a less-efficient workforce, as well as being unfair to non-favoured groups who are less likely to be hired. The proposed solution is to ignore gender or race in the hiring process and hire purely based on ‘merit’. 

The problem with this view is that it ignores an important source of efficiency. Economists who study the production side of the economy document that some factors of production (inputs into the production process) are ‘complementary’ to others. This complementarity is pervasive. With respect to gender, women and men differ in their contribution to firm performance in a range of social, management and negotiating settings. Laboratory experiments have also highlighted gender differences in risk aversion and competitive behaviour, while firm-level analyses have found that gender diversity in corporate boards contributes favourably to risk management, productivity and profits.

The micro-labour economics literature finds consistently that women and men are not perfect substitutes (ie are complements), so that when the relative supply of men and women changes (say, because of military conscription), there are measurable effects on the wages of men relative to women. Could such complementarities between the sexes provide an independent justification for inclusion policies with respect to gender?

By examining the relationship between GDP and inputs of male and female labour in the production function, it has been documented that women and men are highly complementary, with estimates of the elasticity of substitution showing substitutability to be low, or equivalently, complementarity to be high. These findings, moreover, are in line with the microeconomic evidence. The upshot is that, when women are added to the workforce, the resulting increase in GDP is larger than when the same number of men is added to the workforce. In other words, there is a measurable benefit from gender diversity driven by the complementarity between women and men and the fact that female labour-force participation lags male participation.

Even if the average male and female worker are equally productive, the marginal female worker will deliver a bigger boost to GDP than the marginal male. In a hypothetical exercise in which, over time, female labour-force participation rises to parity with male participation, the GDP gain for a typical advanced economy could be 25% greater than in the absence of complementarity effects. For a middle-income country (where gender gaps are larger), gender-diversity effects could result in a near-doubling of GDP gains relative to those estimated in a standard headcount exercise.

Those who deride DEI policies because they give an ‘unfair’ leg up to women should recognise that, because of the diversity channel in the production function, such policies are likely to benefit economic efficiency, a goal shared by those on both sides of DEI debates. Gender blindness in such circumstances would make the economic pie smaller, not bigger. While debates about what constitutes fairness in workforce policies will continue, the gender-diversity channel provides a quantifiable benefit from DEI policies based on economic efficiency that is altogether separate from notions of equity and fairness.

About the authors

  • Jonathan Ostry

    Jonathan D. Ostry is Professor of Economics, Global Affairs and Public Policy at the University of Toronto, jointly appointed to the Department of Economics and the Munk School of Global Affairs & Public Policy. He is a non-resident fellow at Bruegel, a Research Fellow at the Center for Economic Policy Research (CEPR) in London and serves on the advisory board of the World Economic Forum's Global Risk Report in Geneva. Ostry previously served as a Professor in the Department of Economics at Georgetown University in Washington DC and in various senior roles at the International Monetary Fund, including as Deputy Director of the Research Department and Acting Director of the Asia and Pacific Department. Professor Ostry received his PhD in Economics from the University of Chicago, an MSc from the London School of Economics and a BA in PPE from Oxford University.

    Professor Ostry’s recent academic and policy work has focused on the management of international capital flows; this work has been influential in bringing about a shift in the institutional position of the IMF on capital controls. Ostry has also published influential studies on the relationship between income inequality and economic growth, where his work suggests that high income inequality and a failure to sustain economic growth may be two sides of the same coin. Ostry’s work has also focused on the issue of fiscal sustainability, and in particular on the role of a country’s track record of fiscal management in determining access to international capital markets. This work is used by the main credit rating agencies for their sovereign credit rating analysis.

    Professor Ostry is a highly cited economist in scholarly journals (ranked in the top 1 percent of economists worldwide over the past ten years, according to RePEc), and his writings have featured prominently in the financial press (the Economist, the Financial Times, the New York Times, the Washington Post, the Wall Street Journal, Bloomberg, Time, Forbes, Fortune, CNBC, NPR, and the BBC). Earlier in his career, Ostry led the team at the IMF that produces its flagship publication, the World Economic Outlook, and was mission chief for Japan. His recent books include Taming the Tide of Capital Flows (MIT Press, 2018) and Confronting Inequality (Columbia University Press, 2019).
     

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