The UK’s human resources sector is significantly larger than its counterparts in the European Union and the United States, a disparity that new research suggests is contributing to a misallocation of as much as £10 billion in capital across British businesses. A recent paper examining the costs associated with diversity, equity and inclusion (DEI) agendas argues that HR departments have experienced disproportionate growth, placing the UK at the forefront globally in terms of HR employment share.
According to analysis conducted by Policy Exchange, 1.6 percent of the UK workforce is employed in HR roles, compared to just 1 percent in the US and approximately 0.8 percent in the EU. This excess capacity, researchers contend, translates into substantial financial inefficiencies. The estimated annual cost of this misallocation is approximately £10 billion, representing resources that could be more effectively deployed in productive areas of the economy.
“This proves money which cannot be spent on hiring people to work in more productive roles which would help to increase the profitability of their firm,” the report states, highlighting the opportunity cost of an overstaffed HR sector.
The findings have garnered support from prominent political figures, including shadow business secretary Andrew Griffith, who criticized the focus on “ticking bureaucratic boxes” rather than delivering tangible value to customers. Baroness Cash, former commissioner at the Equality and Human Rights Commission (EHRC), also lent her backing to the research.
Griffith stated that DEI initiatives often make businesses “more risk averse, slower, less likely to take a chance on recruiting new staff.” He further argued that the primary beneficiaries of this trend have been “bloating non-jobs in HR or corporate responsibility departments and in some places a string of unaccountable staff networks.”
Beyond the direct costs of increased HR staffing, the report identifies additional financial burdens stemming from DEI-related activities. Researchers estimate that DEI training alone costs UK firms upwards of £1 billion annually, based on data from the US market. The analysis points to companies like Sky News, Unilever, Nestle, and Mars as examples of organizations engaging in “inefficient procurement” due to commitments to prioritize diverse suppliers.
The report doesn’t limit its critique to internal company practices. It also takes aim at government legislation, regulation, and state-backed initiatives, arguing that these factors contribute to the pressures faced by businesses. Specific concerns are raised regarding wording within the equality act related to “positive action,” EDI requirements for company boards, and public procurement targets.
Zachary Marsh, a Research Fellow at Policy Exchange and one of the report’s authors, emphasized the need for governmental reform. “If the government is serious about growth, it should start by getting its own house in order and scrapping burdensome EDI rules and guidance that has created a mass of shadow regulation that businesses feel obligated to follow,” he said.
The findings come at a time of heightened scrutiny regarding the economic impact of DEI initiatives. While proponents argue that diversity and inclusion are essential for fostering innovation and attracting talent, critics contend that they can impose significant costs on businesses without delivering commensurate benefits. The Policy Exchange report adds fuel to this debate, suggesting that the UK’s approach to HR and DEI may be particularly unsustainable.
The report also highlights a broader trend of increasing regulatory burdens on UK businesses, contributing to a climate of uncertainty and hindering long-term planning. According to the Institute for Fiscal Studies, Chancellor Rachel Reeves faces a £10 billion headache in the upcoming Spring Statement, constrained by a bleak economic outlook and self-imposed fiscal rules. This financial pressure could lead to tax increases or spending cuts, further complicating the operating environment for businesses.
The combination of a bloated HR sector, costly DEI initiatives, and broader economic headwinds presents a significant challenge for UK businesses. The Policy Exchange report suggests that a reassessment of current policies and regulations is necessary to unlock economic growth and improve the allocation of capital.
