When and Where Does Workplace Diversity Pay? Institutional and Resource-Based Views

We propose and test a theory of the value of racial minorities’ contribution to firm performance based on the demographic principle of proportional representation in the organization, community, and region. We conceptualize two demographic extremes, rarity and commonness in light of the predictions of institutional theory and the resource-based theory of the firm. Findings show that whether or not workforce diversity pays depends on proportional representation, which exhibits a curvilinear inverted U-shape effect. Diversity has a positive effect up to a threshold of 34 percent racial minority employees in the firm, but beyond the threshold firm performance declines. In theory, initial gains in firm profitability from the increasing legitimacy of a relatively rare minority hire erode with increasing minority hires because firm-based human and social capital resource shortages occurring after the threshold decrement firm profitability. Regional comparison suggests practicing legal services in the Midwest an...