Unequal Sectors Fuel Economic Inequality
America’s strongest and weakest industries need very different public policies.
The industries that comprise the US economy are so fundamentally different from one another that they cannot be understood as a single entity. But most people naturally view economic life through the industry that they know best. Because most of us spend our professional lives in one or two sectors, popular views of economic life can resemble the blind guys grabbing different bits of the elephant – less wrong than profoundly incomplete.
Fortunately for you, dear reader, my short professional attention span has exposed me to restaurants, health care, consulting, manufacturing, nonprofits, technology startups, government, and higher education. I have a deep appreciation for how sector differences help explain much of our regional, economic, and social inequality.
Strong and Weak Sectors Produce Very Different Economic Outcomes
Some industries serve investors, workers, and customers very well. Others are structurally terrible. We can measure the differences between our best- and worst-performing sectors by comparing investment returns, average pay levels, and customer trust and satisfaction. When we do this, we learn that:
Inequality is much greater between sectors than within them. Although an industry consists of companies seeking to differentiate themselves, a biotech company and a fast-food company have far less in common with each other than with their industry peers. Differences and inequalities between sectors deserve much closer attention than they often receive.
Sector inequality helps explain income and wealth inequality. Differences across industries rather than within them account for more than 60 percent of the rise in income inequality. These researchers also concluded that 30 of the 301 sectors they studied accounted for nearly the entire rise in between-industry inequality because pay grew rapidly in these industries and employment grew rapidly in low-paying ones.
Inequality between sectors has grown over the past fifty years. Our most profitable and highest-wage sectors are today vastly stronger than our weakest ones. (The same appears to be true for customer trust and satisfaction, but the data do not extend that far back.)
Owners. By comparing a company's or a sector’s return on invested capital (ROIC) with its cost of capital, analysts can determine whether a company creates or destroys economic value. The variance across industries is enormous, and most companies destroy value. For example, semiconductors and semiconductor equipment have had an average ROIC exceeding 30% in recent years. Other strong sectors include aerospace and defense, and commercial services. Airlines, in contrast, have a long-run ROIC very close to zero. Telecommunications companies average 3-6%, far lower than their cost of capital. Hospitals, healthcare providers, retail grocery stores, restaurants, hotels, and most utilities are likewise chronically unprofitable sectors. These are lousy businesses, even if they offer valuable services.1
Workers. Wages are easy to measure because the Bureau of Labor Statistics reports wage growth across different sectors. They find that the bottom quartile of wage-paying sectors is highly stable over time and closely aligned with low productivity growth. Industries that pay chronically low wages include food service, retail, and hospitality, where workers have weak bargaining power and high turnover. It includes agriculture and nonunion warehouse work, which are physically demanding, seasonal, and often rely on undocumented labor. It includes sectors such as home health, personal care, and child care that exhibit poor business economics and rely heavily on female and immigrant workers.
Of course, worker bargaining power in these sectors is weak because US workers are rarely unionized. However, high-paying sectors are even less unionized, and bargaining for higher pay with economically marginal companies is not easy. When I represented employees of nursing homes, whose revenue depended on Medicare, more than one owner shoved their books at me and said, “If you can find it, you can have it.” The experience taught me to prefer bargaining with profitable companies to those that are structurally weak.
Customers. What about customer satisfaction and trust? The American Customer Satisfaction Index (ACSI) and Gallup industry favorability surveys both measure which sectors consumers like most and least. The Edelman Trust Barometer measures trust levels. The three approaches draw very similar conclusions.
At the bottom of the ACSI rankings are companies that face limited competition and can therefore get away with terrible service: Telecom companies (ISPs and wireless carriers), cable TV providers (historically the bottom of the barrel), and airlines (which face limited competition on most routes). Consumers distrust a second group of companies due to opaque pricing and complex billing cycles. Many of these are health insurance and pharmaceutical companies. The final two lowest-ranked categories are auto dealerships (excepting luxury dealers, cars are a classic “dreaded purchase” for many consumers) and social media companies (which have very low trust and net favorability ratings across all political groups).
The Political Economy of High-Performing Sectors
The top quartile of industrial sectors by returns, wages, and customer satisfaction is innovation-intensive and often characterized by high entry barriers stemming from intellectual property, network effects, or other switching costs. They also rapidly increase productivity (revenue per employee). These advantages usually compound over time.
These sectors account for the vast majority of US profits and wages. Fortune reported that the technology sector alone accounted for 28% of all US profits in 2024. Other top-performing sectors include medical devices and diagnostics, professional and technical services, aerospace and defense, and branded consumer goods. (Pharmaceutical companies fail the “beloved by consumers” test, not due to the efficacy of their products, but to the widespread perception of arbitrary pricing.)
Many top-performing sectors cluster regionally, whereas weak sectors are found everywhere. For this reason, income and wealth inequality are not merely socioeconomic challenges; they are also increasingly regional ones.
Impact of Artificial Intelligence. There are structural reasons to believe that AI will widen the gap between top-performing and lower-performing sectors and increase sector-level wage and wealth disparities. To date, AI appears to amplify returns to scale, data, talent, and capital, which are already concentrated in high-performing sectors. Businesses built around strong IP, large datasets, and extensive cloud infrastructure are more likely to benefit from large language models than your local dry cleaner or coffee shop. Companies that already hire highly credentialed workers, make extensive use of intangible capital, scale globally, and command high markups will disproportionately use AI. They will not only raise margins by automating rote tasks but also increase specialist wages by using AI to complement high-performing skills and derive a competitive advantage from proprietary data and models. These sectors look to improve their already high salaries and returns on capital.
AI is likely to improve the productivity of our most productive people. Generative AI excels at mimicking non-routine skills that experts recently considered impossible for computers to perform, including programming, prediction, writing, creativity, and analysis. As a result, the impact of AI tends to rise with earnings until the 80th-90th percentiles, which include programmers, engineers, and other professionals.
How much AI can improve the productivity of low-wage occupations remains an open question. AI is unlikely to improve most manual-labor or personal-services jobs, although it may enhance the productivity of some less-skilled white-collar jobs. (This is not a prediction of the impact of AI on employment, which depends on many things other than technology. I discussed this question in a recent post.)
Some high-performing sectors benefit enormously from regulatory capture. They want mergers approved, product liability immunity protected, and regulations both standardized and minimized. When that requires them to kiss the emperor’s ring, most pucker and kneel.
Political backlash. Not surprisingly, many of our highest-performing sectors are now facing a global backlash. Trump’s GOP has wholeheartedly embraced the broligarchy, which has returned the favor by making itself politically toxic. For some reason, tech multi-billionaires like Peter Thiel and Elon Musk struggle to express gratitude or modesty. They rarely weigh the impact of their technologies on national security (e.g., Nvidia) or public well-being (e.g., Facebook or X). Last week, Palantir’s Alex Karp gave voice to the broligarch credo when he claimed, without irony, that “if people listened to me more proactively, we’d have a better world.”
Many tech executives have declared war on the often clumsy efforts by the EU to tax and regulate intrusive, addictive, and socially harmful digital products. Trump has magnified their resentment of the EU by denouncing European immigration policies and rallying support for ascendant anti-immigration, right-wing populist parties in the UK, France, the Netherlands, Poland, Germany, and Italy.
Many Americans struggle to take seriously the protests of men with private jets ready to whisk them to the safety of private-island compounds if their enormous technology bets go awry. As a result of these dynamics, both left and right populists are eager to politicize and penalize America’s most successful companies. This is, of course, madness. China could not have dreamed of a better outcome.
The Politics of Weak Sectors
The bottom third of commercial sectors – the ones most likely to disappoint investors, workers, and consumers – is an entirely different world. These sectors collectively account for a large share of employment but a small share of economic profits. Businesses in these sectors have skinny profit margins (restaurants at 3-9%, with full-service typically at 3-5%), wage increases that do not keep up with price inflation, and lower customer satisfaction, particularly in hospitality, service, arts, entertainment, and retail.2
The bottom third includes airlines (despite being relatively high-wage), telecommunications/ cable/ broadband, hospitals, fast-food, childcare, and most retail stores. They hire many more workers than top-performing sectors and typically pay them far less. They are the source of most consumer frustration.
Many suffer from low productivity (the only way to care for twice as many children or to cut twice as much hair is by doubling the headcount). They are often easy industries to enter, so they feature intense price competition and low profit margins. They struggle to attract investment capital (you would not invest your savings in your local dress shop, even though the proprietress may have). In almost every case, the industry remains too fragmented to achieve economies of scale.
Public policy for struggling sectors should focus on supporting workers while helping businesses improve productivity.
Wage Support Programs. Minimum wages and wage subsidies, such as the Earned Income Tax Credit (EITC), help boost take-home pay for low-wage workers. The EITC increases employer demand for labor, whereas minimum wages often decrease it. Expanding the EITC to include more childless workers could significantly benefit sectors such as hospitality and retail.
Sector Wage Bargains. I have extolled the virtues of sector wage bargains here, here, and here. These are difficult to establish because federal law preempts state initiatives to create classic collective bargaining rights. States like California, Massachusetts, and New York have successfully used wage boards to convene industry-wide standards boards. California’s wage boards have successfully raised minimum pay for fast-food workers, who reached $20/hour in April 2024, and for healthcare workers, who reached $23- $25/hour through phased increases that began in October 2024.
Workforce Development and Training. Proven training programs, subsidized employment, and registered apprenticeships help workers gain skills that increase productivity and pay. Models such as the Culinary Academy of Las Vegas and the Los Angeles Hospitality Training Academy demonstrate that sector-specific training can raise both wages and productivity simultaneously. This addresses the core problem: industries with razor-thin margins can raise wages substantially only as workers become more productive.
Subsidized Employment Programs. For workers facing barriers to employment, subsidized employment programs have increased participants’ earnings by up to $3,700 in some cases and can reduce expensive turnover costs that plague low-wage industries.
Child Care and Paid Family Leave. Access to affordable child care and paid family leave improves job stability in sectors with unpredictable schedules. When workers can reliably report for work, businesses reduce the costly cycle of rehiring and retraining.
Targeted Tax Relief and Business Assistance. For struggling sectors, tax breaks conditioned on maintaining employment levels or investing in training can provide breathing room while encouraging better practices rather than just protecting the status quo.
Won’t wage increases drive some companies in marginal sectors out of business? Yes, especially weak ones. Although many studies find examples of minimum wage increases that have no measurable effect on unemployment, another found that “a one-dollar increase in the minimum wage leads to a 14 percent increase in the likelihood of exit for a 3.5-star restaurant (which is the median rating on Yelp), but has no discernible impact for a 5-star restaurant (on a 1 to 5 star scale).”
Weak sectors can benefit from active labor market policies that are entirely unnecessary in strong sectors. These policies are most effective when they support workers directly through wage supplements and training while simultaneously helping businesses become more productive.
CODA
Public data do not provide a single precise “fraction” of US public companies that consistently earn their weighted average cost of capital (WACC). Still, most broad‑market analyses find that well under half of listed companies generate ROIC or return on equity (ROE) at or above their estimated cost of capital over time, with many hovering below this hurdle except during extreme cycles.
Like Tolstoy’s unhappy families, each poorly performing sector is weak in its own way. Airlines suffer from high fixed costs and an undifferentiated product. Telecommunications and cable companies face substantial capital expenditures and low differentiation. Utilities require lots of capital but have their returns regulated. Hospitals and provider groups face strong payers and high inflation. Grocery stores typically have massive price competition and low margins. Retailers and newspapers face digital disruption from online competitors.