Best to own a business rather than work for one

by Rebecca Wilder

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….

cross posted with The Wilder View