Inclusive Growth means thinking about low-pay sectors

Economic development tends to focus on the glamorous parts of the economy. Many cities, for example, are trying to attract Channel 4. In the US, they are bidding for the (second) Headquarters of Amazon. This focus is understandable, as sectors such as high-tech or media tend to produce some highly-skilled, well-paid jobs. But it isn’t clear whether these strategies are ‘inclusive’. Policymakers simply assume any benefits will ‘trickle-down’ to the disadvantaged.

But this focus on glamorous sectors means we ignore other parts of the economy, and these are often where the less affluent work. The UK has a low-pay problem. Almost half of the low paid – defined as those earning less than 2/3rd of median hourly pay – are employed in three sectors: Retail and Wholesale, Accommodation and Food, and Social Care. Sectors like these produce a large number of jobs, but these jobs are often poorly paid. As Anne Green, Paul Sissons and I argue in a series of ESRC reports, if we really want growth to be inclusive we need to focus more on these ‘mundane’ sectors.

There are low paid workers in every sector of the economy. But the rate is much higher in some than others. Around 60% of workers in Accommodation and Food Services are low-paid, the highest rate. But there are also high rates in Residential Care (40%), Wholesale and Retail (39%), and Agriculture, Forestry and Fishing (35%).

Is this because these sectors tend to employ workers who are poorly qualified or have low skill levels? While this is partly true, the sectoral effect exists even once we control statistically for characteristics such as qualifications, age, and ethnicity which might be otherwise associated with low pay. If we took two workers, both identical in terms of these characteristics, and put one in Manufacturing and one in Accommodation and Food Services, the latter would be almost 50% more likely to be in low pay. These patterns are similar, but less extreme, for household poverty. Compared to one where the main worker is in Manufacturing, a family where the main earner works in Accommodation and Food Services is 12 percentage points more likely to be in poverty.

Even more concerning is that many of these sectors are forecast to grow in future. Back of the envelope calculations using the Government’s ‘Working Futures’ projections, shows an expected 190,000 low paid workers in Accommodation and Food Services by 2024, and another 131,000 in Wholesale and Retail. If these projections are half right, growth is unlikely to be inclusive.

But fortunately, a focus on sectors can help reach those on low incomes. Many institutions which help address low pay – such as Unions, or Sector Skills Councils – already have a sectoral focus. Business models within sectors are often similar, so this provides a route in. International evidence suggests that these sector-focused approaches can be an important part of addressing low pay. The US WorkAdvance Programme, for example, helped low income adults enter and progress in high demand sectors of the economy. A high quality evaluation showed that it achieved both goals.

Policymakers like glamorous sectors. But Inclusive Growth cannot be achieved with this focus alone. Instead, we need to think about the parts of the economy where most low-paid workers are. Rachel Reeves refers to these as the ‘everyday economy’ and they will be crucial to efforts to reduce low pay. Inclusive Growth means fewer bidding wars for corporate headquarters in high-tech sectors, and more efforts to upgrade jobs in the mundane parts of the economy.