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Across the Economy, Workplaces Are More Segregated Than 40 Years Ago

Harvard, Stanford researchers say influx of newer, smaller companies partly to blame

A pair of people on a balance scale.

​While there may be more racial diversity in large, established companies than in decades past, the influx of new companies—which tend to have far less racial diversity—into the U.S. economy has more than offset any gains that U.S. organizations have made overall.

Because of that dynamic—and because some older, more traditional companies are going out of business—racial segregation in U.S. workplaces is greater today than it was in the '70s, according to new research by sociologists from Stanford University and Harvard Business School.

"The turnover of organizations appears to have washed away progress on racial employment integration," said Rembrand Koning, one of the lead researchers and an assistant professor of business administration at Harvard Business School. "We find that the rise of workplace segregation has occurred because of the differential turnover and growth of firms. If young and small firms tend to be more segregated, [and] if segregated firms are growing faster, then efforts to diversify existing firms may be swamped by these business dynamics."

And that means, he said, that HR policies in a firm may not be enough to overcome this segregation, a term the researchers used interchangeably with "lack of diversity," meaning mostly white.

"We need to think more broadly about how industry dynamics, entrepreneurship and strategy play a role in shaping workplace diversity." 

More 'Churn' at the Top Than We Realize

The researchers recently analyzed more than four decades of Equal Employment Opportunity Commission data on the racial makeup of private-sector workplaces in the U.S. They discovered that across companies, workplaces are pretty homogenous—more so than 40 years ago.

Larger, more established companies do become more racially diverse over time, said John-Paul Ferguson, Ph.D., the other lead researcher and an assistant professor of organizational behavior at Stanford's Graduate School of Business.

But they can become only as diverse as their local labor markets allow, he said. And some are going out of business "in the way all firms do over time."

"They are replaced by firms that, on average, are less diverse because they are smaller startups," Ferguson said. "And while these firms also tend to become more diverse over time, the turnover in the population of firms more than swamps the progress made within firms. Thus … segregation has been rising."

Research from DXC Technology that appeared in the July 2017 issue of the Harvard Business Review noted: "Research shows that since 2000, 52 percent of companies in the Fortune 500 have either gone bankrupt, been acquired, or ceased to exist ..."

"Big firms can fail, shrink dramatically or be acquired," Koning said.

Most laws around workforce discrimination in hiring kick in when firms reach a certain size. Newer, smaller firms tend to rely more on social relationships for hiring, while older, larger firms have more formal procedures in place to increase diversity, Ferguson said.

"Thus, it is likely that a newer, smaller firm is less diverse than an older, larger one. This doesn't involve people breaking the law; it involves people doing things like hiring through their social networks, which we know from other research are pretty segregated by race."

Carisa Miklusak is CEO of Tilr, a Cincinnati-based company that has created algorithms that companies use to vet and place job seekers without any interview or phone screen. Mostly, the service is used for temporary jobs, although Tilr plans to test its platform for full-time positions in late 2018 or early 2019.

Miklusak said she's not surprised that startups tend to be homogenous—particularly in the venture capital, growth equity and private equity industries. Those industries, she said, have "emerged in a very traditional fashion—almost fully dominated by white males."

Lack of Horizontal Inclusion

Sixty-nine percent of CEOs consider diversity to be important, according to a February survey by Deloitte, which noted that there are more corporate diversity trainings, inclusion initiatives and tech-based hiring solutions than ever.

Ferguson and Koning's study also found that while there are more people of color across occupations, there are more nonwhite workers in low-wage janitorial, kitchen and service roles that support each workplace. This amplifies segregation in companies, they said.

"The study states that although there may be more minorities, women and [underrepresented] workers in categories in general, individual employers are still extremely homogenous, and there is a lack of horizontal inclusion," Miklusak said.

So to what can one attribute the researchers' findings? Miklusak agreed with Ferguson.

"My personal opinion is that it's the hiring practices," she said. "If you ask an employer in the last decade what their best hiring method is, they will tell you referrals. Naturally, people tend to refer people more like themselves."

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The best way to address a lack of diversity or the presence of segregation in a workplace, she said, is to hire candidates based on their skills alone, while ignoring gender, race, age and other factors.

"Algorithmic hiring platforms tend to render any type of discrimination impossible," she said. "By matching on skills, location and availability, [they] ignore things like gender, background or even your past title and, hence, level the playing field for all types of workers."

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