Local labour market diversity and business innovation: evidence from Irish manufacturing businesses

Abstract

This paper estimates the effect of diversity within local labour markets on business-level innovation. Using survey data and Irish census data, the paper explores whether the diversity of human capital at county level is associated with higher innovation output. Diversity in age, nationality and educational attainment is measured using an index of heterogeneity and its effect on business innovation is estimated using an innovation production function approach. It is found that diversity in nationality and educational attainment is positively associated with the probability of a business product innovating. The findings also suggest that greater external labour market diversity and greater levels of internal third-level education may be substitutes. Where a business is in a diverse location, it may not require higher levels of educational attainment among its workforce to source knowledge for product innovation.