Are Firms Sacrificing Flexibility for Diversity and Inclusion?

This paper examines the impact of workforce diversity and inclusion (D&I) on a firm's operating flexibility, using a novel employee rating of D&I introduced in 2020. I extrapolate the D&I rating back to 2008 for thousands of companies, using a model that surpasses humans. I find that diverse and inclusive firms (D&I firms) exhibit lower flexibility. Moreover, an improvement in D&I due to a court ruling results in a decrease in a firm's flexibility, suggesting a causal effect of D&I. I explore why D&I firms have lower flexibility by studying firms' response to a major economic shock and find evidence that D&I creates frictions in operating efficiency rather than workforce management