Britain May Repeat the Economic Errors Fixed by Thatcher

Britain is seriously considering requiring its businesses to incriminate themselves for racism. That is the inescapable conclusion if reports are true that Prime Minister May’s government is contemplating following a flawed government study on ethnicity outcomes with a mandate that businesses similarly report pay. May should tread carefully, lest she return Britain to a path it abandoned just a generation ago.

Earlier this month it was reported that Prime Minister May is considering requiring business to report pay differences among ethnic groups. Currently, British businesses only do so voluntarily, and EU data protection rules limit their ability to store employee information.

The 2017 study provoking May’s consideration should prompt businesses to resist such a mandate. Avoiding government requirements is usually advisable, as they frequently deliver burdens outweighing benefits. In this case, it is unusually astute, because the burden could extend well beyond business.

Such reporting will be time-consuming and costly, but more importantly, inaccurate — if it follows the errant methodology of 2017’s Race Disparity Audit. That report intended to shine “a light on how people of different ethnicities are treated across public services” and “present the data objectively and meaningfully.”

The Audit recognized the data’s limitations — “having insufficient numbers of cases to study” and “often not adequately distinguish[ing] the different experiences of people within such broad groups.” Yet despite acknowledging its limitations, the report had no problem reaching a definitive conclusion: “The disparities highlighted by this Audit are significant......It will require a concerted effort by Government, partners and communities working together. We want to build a country that works for everyone — and that means tackling the injustices that hold people back in life.”

The Audit’s fundamental problem was it simply presented data by ethnic groups. What it failed to do, was to sort it into like categories before analyzing it. As a result, it ignored vital characteristics. Education, age, experience, ability to speak English, health, incarceration history, and drug usage — all examined in the Audit — were not used to examine different ethnic groups with similar characteristics.

The result was profound differences being ignored. If disproportionate in one group, then that group is disproportionately affected. Comparisons then could yield a false positive, whereby differences were mistaken for discrimination, when actually differences in key variables explained group differences.

The way to test for one variable — here, discrimination — was to hold other variables constant so, differences could be attributable to the variable being examined. Prejudice — the “injustice” the Audit cited — should mean that differences were solely due to ethnic considerations. That is done by measuring representatives of different ethnic groups with similar relevant characteristics — education, experience, etc.

This failing was bad enough in the Audit, but if the same flawed methodology is applied to a simple aggregation of private sector data, businesses will be left holding the bag, not government. If education, experience, and other essential elements to employees’ value — their ability to create value — are not accounted for, then of course wage discrepancies will be (and should be) found if there are differences in these variables between ethnic groups.

Consider then the next step: Correcting such non-prejudice wage disparities. The false impression of ethnic wage disparities will actual lead to real wage disparities — paying employees not according to performance, but to socially acceptable norms.

Unlike the public sector, the private sector must earn its way. So, if a false positive of ethnic pay disparities is found, then wages must be reallocated away from workers who should be earning more (because they are creating more), and redirected to those creating less.

This will be a disincentive to both. The one creating more will have less incentive to do so. The one creating less will have less incentive to improve the causes — such as education and experience — holding him back.

Like Gresham’s law in economics, the less valuable will drive out the more valuable. Businesses in turn will be less productive. Yet, they will be unable to escape the cycle of “fixing” ethnic pay disparity. Even as their profits fall, they will have to pay to avoid “injustice” — not according to what improves their bottom line.

If this sounds far-fetched, it should not to Britons old enough to remember their government’s policies that accomplished the same thing through tax policy. Confiscatory taxes once routinely emigrated an army of tax exiles from the British Isles and created an increasingly stagnant economy at home. The means of redistribution — government directly, then via tax policy, or government indirectly, in the future through pay policy — is irrelevant compared to its impact.

A generation ago another British Prime Minister confronted the insidious effects such disincentives had on the nation’s economy. Prime Minister May would do better to consult the record of her predecessor, Margaret Thatcher, than her government’s blueprint for replicating the errors Thatcher fixed.