Valuation of ethnic diversity: heterogeneous effects in an integrated labor and housing market

Abstract

We estimate the heterogeneous impact of the scale, composition and consumer good effect of ethnic diversity on individuals' job and residential location. Using an extensive pooled micro panel data set in which homeowners in the Netherlands are identified in both the housing and labor market, we can derive the combined effect of ethnic diversity in both markets. We test a model that integrates the utility and production function such that the location of work and residence is determined simultaneously by taking into account observed and unobserved heterogeneous individual behavior on both markets. We find that the scale of ethnic diversity, that is the share of immigrants, at the city level is mostly positively related to both wages and house prices. This is mainly through a positive productivity effect of immigrants, which results in negative implicit prices for housing (although small) in a city with a higher scale of ethnic diversity for the majority of the individuals in our data. The scale of ethnic diversity is only positively related to utility for a small group of homeowners, while the composition (diversity among immigrants) and the consumer good-effect (ethnic diversity of restaurants) of ethnic diversity show overall no significant effect on both markets nor significant implicit prices. Moreover, we find that the majority of Dutch homeowners do not sort themselves out over municipalities by their preferences for ethnic diversity.