Ethnic diversity is often seen as a threat to political stability. But some countries have adopted a more accommodating approach, reflected in the adoption of multiculturalism policies for immigrant groups, the acceptance of territorial autonomy and language rights for national minorities, and the recognition of land claims and self-government rights for indigenous peoples. Such “multiculturalism policies” have been criticised, however, as making it more difficult to sustain a robust welfare state. This paper examines empirically whether this effect exists. We find no evidence of a consistent relationship between the adoption of multiculturalism policies and the erosion of the welfare state. The evidence in this paper suggests that debates over the appropriateness of multiculturalism policies should not be pre-empted by unsupported fears about their impact on the welfare state.