Equality, diversity and inclusion costs money

There is a strong case for saying that equality diversity and inclusion (EDI) imposes costs upon businesses that make them more expensive and less competitive than they could otherwise be.

 EDI functions rarely pay for themselves. Diversity officers, training programmes, consultants and reporting systems all carry direct costs. For a large firm this might be marginal. For a small or medium enterprise it can be a meaningful fixed cost that a foreign competitor without equivalent obligations does not bear.

EDI involves time diverted from output because training sessions, unconscious bias workshops and committee meetings consume staff hours. Those hours are not spent on production, sales or innovation. The opportunity cost is real even where the direct financial outlay looks small.

It distorts selection criteria. If hiring or promotion decisions pursue demographic characteristics alongside or instead of demonstrated ability, the pool of appointees will on average be less well matched to the role than under pure merit selection. Economists call this an allocative efficiency loss. A firm that must satisfy two objectives, competence and representation, will sometimes have to trade one against the other. Its competitors who face only the first objective do not.

There is a regulatory and reporting burden. Gender pay gap reporting, diversity disclosures and related compliance requirements add administrative overheadsthat sit heavily on smaller firms. Large corporations can absorb this in a compliance department. Smaller ones cannot, which gives an advantage to scale incumbents over challengers, itself a distortion on competitiveness.

There are litigation risks in both directions. Firms face discrimination claims if they fail to promote diversity, and reverse discrimination claims if their diversity policies are seen to disadvantage those outside protected categories. Legal exposure and the insurance and legal advice needed to manage it rise on both fronts simultaneously.

The evidence of return is weak because much of the case for EDI as a driver of performance rests on correlational studies, most prominently from McKinsey, that have not held up well under independent replication. Some diversity training research finds no behavioural effect or even backlash effects. If the expenditure produces no measurable productivity gain, it is a pure cost with no offsetting return.

Firms competing globally against companies based in jurisdictions with no comparable EDI requirements bear a compliance cost their competitors do not. Over time this can affect where investment and jobs locate.

Proponents make a countervailing case, claiming that talent pools can improve hiring quality rather than degrade it, particularly where selection was previously narrowed by informal networks rather than by merit. Some EDI spending, such as removing bias from recruitment processes, is arguably cost-neutral or cost-saving since it improves signal quality in hiring. And avoided litigation, from discrimination claims that well-run EDI policies help prevent, is itself a cost saving, not just a cost.

The empirical dispute mostly comes down to whether a given EDI intervention can plausibly pay for itself, or is badly designed and box-ticking, in which case the cost case applies with force.

This analysis suggests that in most cases, pursuit of EDI policies impose costs with no commensurate gains.

Madsen Pirie