The DEI Dividend—In Reverse

Every year for more than three-quarters of a century, the federal government has issued a book-length report on the economy: The Economic Report of the President. Probably most readers use it mainly for the several dozen pages of appended statistical tables, but this is preceded by what the President’s Council of Economic Advisers has to say about the condition of the economy. Usually, those 300 or more pages of verbiage are of limited interest to even the most nerdy of followers of the state of economic affairs in America.

This year, my friend James Creigh suggested that I read the relatively short (10 pages) Chapter 10 of this year’s report on the “Economic Consequences of DEI.” Good advice: it was certainly provocative and even compelling reading. While affirmative action programs that effectively provided modestly preferential treatment for members of minorities applying for jobs, contracts, and college admission have been around for decades, the authors note that far more strident diversity, equity, and inclusion (DEI) initiatives were relatively rare before 2013, but became very important throughout the remainder of the decade until peaking perhaps a couple of years ago.

For over a decade, race, ethnicity, and gender considerations clearly played an important role in hiring people for highly responsible positions in both business and government. In many settings, DEI apparatchiks gained near dictatorial powers, and managers of organizations ignored them at their peril.

The findings cited in the Economic Report are striking: the vigorous pursuit of DEI practices led to lower productivity and output, ultimately reducing the standard of living of Americans. A few quotes: “By 2023, industries that heavily pursued DEI were approximately 2.7 percent less productive than those that did not … the cost of mismanagement was roughly $94 billion annually by 2023, or 0.34 percent of U.S. GDP. This is an average cost of about $1,160 annually for a family with two working adults. … This calculation only captures the effects of identity-based promotion into management; it does not include the costs of stigmatization, in which highly qualified minorities face perceptions of unfair gain. (Coate and Loury, 1993).”

These findings seem consistent with those revealed by a decidedly less rigorous and scientific look that I did of labor productivity data in the business sector using the same Economic Report. From 2016 to 2023, a period of widespread and growing use of DEI practices, labor productivity rose about 1.8 percent a year; but it jumped to about 2.3 percent annually from 2023 to 2025, as DEI came under attack and some managers reduced or ended the pursuit of DEI objectives.

A profit-maximizing business strives to get more output from each unit of input used in producing its goods or services. If a widget worker receiving a $20 hourly wage produces four widgets per hour, labor costs are $5 per widget (whatever that is), but if the worker makes five widgets hourly, labor costs fall by 20 percent to $4 per widget. Over the last several decades, labor productivity has risen anywhere from one to three percent annually in the whole U.S. economy, leading to a higher standard of living, increased leisure time, and other benefits. An important contributor to this growth has been hiring the most productive person available per dollar spent on labor costs. The skill sets and personal dedication of workers are critical, while factors like their gender, race, religious affiliation, or national origin are irrelevant.

Yet DEI upended all this. DEI bureaucrats were only interested in previously irrelevant factors like skin coloration. Moreover, there are differences in productivity by racial group, gender, etc., so downgrading or even outlawing consideration of the differential skill and work habits of employees has inevitably led to lower productivity. What this means is we must pay more for goods and services we cherish, since their supply is somewhat reduced.

Ignoring the costs of stigmatization means earlier cost estimates are likely understated. I have had anguished conversations with very bright and productive black scholars who rightly despair when others attribute their vocational success to heavy-handed race-based DEI policies rather than to their very real personal accomplishments.

As a professor, it pains me to remind readers that DEI was largely an invention of American higher education, which was at the forefront of the movement, even shaming private business to emulate it to avoid being called pejorative terms like “racist” or “sexist.”

Not only has DEI lowered productivity and thereby the standard of living, but the Star Chamber-like behavior of some DEI administrators of campus and probably corporate dealings with managers, unquestionably, sometimes led to fear, intimidation, self-censorship, and a decline in true freedom of speech and expression. The recent attacks on the academy by governments, wealthy donors, and others are at least partly justified by what economists call the “negative externalities” associated with the growth of DEI practices that originated largely on college campuses before spreading to corporate America.