EconoMonitor

The Wilder View

Best to own a business rather than work for one

In my effort to move away from covering Europe exclusively on this blog, I’ve returned to a little niche of economic data that had intrigued me in the past: US national income accounts/accounting. This time I’ll look at national income, specifically corporate profits – I’ve written about it before, and my colleague Ed Dolan covered it on Economonitor in June.

It’s best to own a company rather than work for one

Ed Dolan reports that corporate profits are rising as a share of gross domestic product at the expense of small business income and presents normative solutions. This redistribution of business income toward large corporations is a relatively recent phenomenon. Proprietor’s income as a share of national income peaked in the mid 2000s and has broadly declined; but before that point, proprietor’s income (green line) and corporate profits (purple line) jointly trended higher as a share of national income while gross employee compensation declined (blue line). It’s the business employees that are the real losers in this cross section of income.

On a relative basis, corporate profits surged since the financial crisis, reaching 13.9% of national income in Q1 2013 (2 standard deviations above its mean), while proprietor’s income retraced some of its loss after bottoming out at 8% of total income in Q2 2009. In contrast, employee compensation hit a new low in Q1 2013, representing just 61.5% of national income (2 standard deviations below its mean).

Note: the numbers in the chart legend represent the latest available data for Q1 2013.

This is a crisis of labor income. Where and when will the redistribution occur away from corporate profits and retained earnings and toward employee wages? I hope some miraculous investment in labor occurs soon, but the current state of the labor market doesn’t portend that a shift is imminent.

At least for now, it’s better to own a business than to work for one.

Up next this week: why the corporate profit numbers mean what you think they mean….

7 Responses to “Best to own a business rather than work for one”

McWattJuly 22nd, 2013 at 2:04 pm

Let's correct that statement: It's best to own a large multi-national corporation with unlimited access to funding. It's not best to own a small business. This has been true for only the last 7 years. Still out here deleveraging and hanging on by our fingers,

Sincerely,

American Small Business

DiranMJuly 22nd, 2013 at 4:24 pm

Cogent point. In Euroland, it is even more nightmarish with EU big government, taxation even for companies making losses, and general debt deflation that Europeans think is just great with their passionate love for deep recessions and massive unemployment.

Needless to say with the Euro-zombie banks, there is a very defined pecking order: bankrupt sovereigns get any first cut, small business is starved out, medium-size entreprises struggle and large enterprises get the lion's share of what is left.

simple mindJuly 22nd, 2013 at 4:01 pm

I own an small business and work nearly 60 hours a week for not so much money. But I don't make my employees take (bulls***) drug tests! Yay!

ajaneJuly 25th, 2013 at 9:26 pm

And we have the Obama care breathing down our necks. Why hire or change payroll expenses until one knows how this will affect them. One chiropractor I know and her staff are wondering what in the world they are going to do. Not fun for people with families.

tewAugust 1st, 2013 at 4:16 pm

Re: "…it’s better to own a business than to work for one"
No, as your data show, it's better to own shares in a large, powerful corporation than to run a small business or work for one.

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