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Data from SCF & questions for the future

6TH PART

Wednesday 21 December 2016, by Bernard Zimmern

1. Increase in top incomes not matched by economic expansion

Log curves extracted from the SCF published in Fifth part have shown a decrease in slope measured by the α that is in accordance with an increase in inequality noticed by numerous publications but which should also lead to an increase in economy ceiling if our theory holds.
As far as income are concerned, they indeed raised for the top as shown by Forbes billionnaires list.
But the rate of increase of the economy has dropped from 2008 from a height of 3,5% per year to a paltry 1%-1,5%.
What can explain those diverging occurences ?

IRS DATA

Our α [1] were extracted from the SCF surveys but they are confirmed by the income distributions using statistics from the IRS, based on all 1040 tax reports and not on only 6 000 interviews.

As already found from the SCF data, they show also a drop of the α (slopes) with the time passing by.
They show also a drop of the slope when reaching the higher incomes [2].
This is due to the density of entrepreneurs increasing with the level of income, as already published by Cagetti and De Nardi (2006) in combination with the fact entrepreneurs have a lower α then the rest of the population.
From those IRS data, we can calculate the α for each zone, those belonging to the 0,1% to the 1% highest income, then those in the 1% to 5% interval. Here are the results from 1980 to 2012.

IT LOOKS LIKE THE ECONOMY HAS BECOME MORE UNEQUAL BUT THAT IT HAS NOT BEEN ATTENDED BY AN ASCENDING ECONOMY, AS ECONOMY HAS STOPPED ITS ASCENSION AROUND 2001.

Source : IRDEME’s calculations from the SCF surveys.

HOW TO EXPLAIN SUCH A DISCREPANCY ?
- IS IT THE CONSEQUENCE OF 9.11 ?
- OR OF THE EXPLOSION OF THE 2000 NUMERICAL BUBBLE ?
- OR, AS QUESTIONED BY THE KAUFFMANN FOUNDATION, A LOSS OF NEW ENTREPRENEURS AS YOUNG PEOPLE WERE MORE ATTRACTED BY QUICK BUCKS MADE IN FINANCIAL JOBS ?
- OR AN EXPLOSION IN THE US BUREAUCRACY THAT STOPPED THE DEVELOPMENT OF SO MANY FIELDS ?
- OR AN EXPLOSION IN WEALTH TRANSFERS THAT INDUCE A LOT OF YOUNG MALES TO LIVE ON FOOD STAMPS AND STAY HOME PLAYING GAMES AS REMINDED BY THE WALL STREET JOURNAL?

We are not accounting here for what would be egalitarists explanation, that increase in inequality is leading to less economic expansion, as 1990 to 2000 has seen just the reverse as seen on above graphs.

2. Is US employment going up ? Entrepreneurship has been playing a major role in job creation and income increase but is this role fading out ?

A background model on the jobs spat in the economy.

There is indeed a question here : unemployment has dropped since its peak around 2008, but it is known that this drop came from unemployed people moving out of the work market, more than from the increase in available jobs.

Where are the jobs born ?

To answer that question, we have used the following course of thinking :

- Jobs in the publicly traded companies are coming from « private » ones that become public by IPO’s or are purchased by public companies. If not fed by private businesses, the jobs in public companies would drop [3];
- Out of private businesses, only the long term businesses matter as service businesses are entirely linked to the amount of the population AND to the long term businesses that need services. One of the main mistake of French goverments has been to hunt only for those services , not the long term ones and higher unemployment experienced by the French economy is the result.
- So the measure of future jobs growth comes from the long term jobs creation
- But those long term businesses take on average some 10 to 20 years to mature. Is nevertheless forecasting their appearance possible from statistics of 99% businesses where they belong first?

To be able to answer these questions and measure the private sector expansion, one needs to know first how many workers work in it? We can indeed use the answer to question X3111 (how many workers are employed in your business ?) but its use is a target fraught with traps

The first one is that the SCF covers only businesses that are not publicly traded (« private ») and we have not found any public data that tells how many they employ, just a few sparsed references saying probably around half of all US workers.
So, in some ways, the SCF might be the first survey that throws a light on the total employment in « private » businesses.
As shown below, it is close to half but probably closer to 60%.

The second one is that the same business can be covered in a survey by answers of different owners.
To get around this one, we have used the percentage of ownership and it leads to values of the « duplication » factor, the number of times the same business is covered ; what is comforting is that this coefficient is not too erratic with time.

And, third, employment derived from the Survey (using the two businesses in which someone can be active) [4], is fairly erratic. It comes to 70 millions in the 1989 survey to 115 millions in the 1992 one and drops to 63 in the 1995 one.

The reason is that it combines two erratic factors in sampling interviews :

- The fact employments is Pareto distributed as is income distribution ; it has a long tail, with huge outliers.
- People producing the Survey are providing weights that allow results based on only 6 000 interviews to apply to 120 million households ; obviously, these weights are well distributed to account for income but they are not well distributed for variable X 3111 (employment). From time to time, they have to give a push to weight in the high end of incomes ; and suddenly, those weights raise from a few thousand to over 10.000. When this falls on an outlier of employment, this lead to just a few interviews out of the 6 000 representing half the total employment ! When we remove, in the surveys, values of X3111 weighted above 1 million, total employment changes from one survey to the next falls within a few percent (as could be predicted from the log- log slopes which are very close one to each other). Below is the ratio of the total employment in private business to the total employment published by the DOL. This ratio changes but very smoothly.
-

70 + millions could be linked to the 142 millions employees reported by the Department of Labor for 2012 [5].

Those data show that non publicy traded businesses (« private businesses ») carry a little more than half the total jobs in the US ( 80 millions or above when taking into account all corrections including non active entrepreneurs) out of 142 million from the DOL (Department of Labor) based on same definition (workers paid or unpaid).

Inside the private businesses, which ones are creating jobs ?

We have shown that one has to distinguish betweeen long term businesses, that make their owners part of the 1% top incomes and the 99% that are, (except for long term businesses not yet in the 1%), local service businesses for most of them.
The average number of workers (21 against 2,9) as well as the amount of money invested and the time to blossom were clear separating characteristics.

The SCF gives here remarkable data as, at the same time, it gives employment, income of the household (and many other data such as wealth, profit from the business, etc. that we will use later) and it tells how the entrepreneur became owner : by inheriting, creating, purchasing, or being made a partner.
The creation is oviously the most important of all jobs origins with around 50 millions out of 80 millions.
For those economist that chide heritage as the way to wealth of American people, it should be comforting to discover that their share is around 10%...
It is also interesting to see how income plays in jobs creation as per the graph below.
The highest incomes are also those creating or employing the maximum number of people.

The above graph shows the number of people employed by each category of entrepreneur (heirs, buyers, entrepreneurs having created their business and belonging to the 1% top US income, entrepreneurs having created their business and not belonging to the top 1% US income) cumulated according to the entrepreneurs income in ascending order from the left.
It is clear that the first centile employs the highest proportion of employees, i.e. approximately 30 millions out of the total 76,8 millions + [6] employed by non publicly traded businesses.

Are long term entrepreneurs developing in the US ?

Using employees calculated from the X3111 but eliminating all weighted values above 1 million (the number of employees extrapolated from one interview), this lead to the increasing total employment values recorded below.

This shows an increase in the employment by « private » (non publicly traded) businesses as they increase employment by 61% from the 1989 survey to the 2013 whereas the DOL shows an increase of employement of only 21% (115 millions to 142).
It suggest the whole increase of 27 millions measured by the DOL between 1989 and 2013 would come from private businesses (43 to 70 million).
And 16 millions out of 27 million (from 12,1 to 28,6) would come from the 1% entrepreneurs (and by difference 11 millions from the 99%) of which half, 8,1 millions, from the 1% entrepreneurs who created their business.

This has lead to employment by the entrepreneurs belonging to the 1% climb from 28% in survey 1989 to 41% in survey 2013 and the part by entrepreneurs of the 1% having created their business, to climb back to 23% in survey 2013 after droping from 18% in 1989 survey to 12% in 1992 o,e.

We suspect the drop from 1989 to 1992 is coming less from the Gulf war than from the 1986 Reagan tax law ; we have shown (http://www.irdeme.org/La-reforme-fiscale-de-Reagan-en.html) it had generated the first major drop in business creations, that stopped when Bill Clinton reestablished loopholes in 1992 and eliminated the Reagan reform that was closest to a flat tax.
Overall, it looks like the rate of creation of employees by long term businesses has dropped compared to the creations of jobs by the existing long term businesses ? But is it the sign of less entrepreneurship or just from a rapid increase of jobs that diminished the part of creators but not their absolute value ?
That should be the target of further research.

3. What makes the 1% coming to the top ?

One of the surviving legend that is running hard is that the top 1% income would draw its income and wealth from top executive positions.
This is what ascertains Thomas Piketty in page 500 of his French edition of Capital in the XXth Century explaining that it is a anglo-saxons phenomenon.

But data from SCF show that wages have fallen behind income from LLC and Sub S corporations that are the real mover behind the increase in income and wealth (Walmart is still a family LLC though including 3 billionnaires, heirs to the founder Sam Walton).

SubChapter S corporations have been the real income increase for the rich. In Subchapter S, the owners are taxed directly for the profits (or detaxed for losses) in proportion of their share in the capital but their liability is limited to their amount invested in the capital. Created by Congress in 1958, they have seen their expansion broaden around 1980 with the creation of LLC and LLP by states.

Now, there are around 150 households claiming yearly income above 10 millions dollars and the larger portion of that income is not coming from wages but from SubChapter S/ LLC/LLP.
Out of the 1% creators, 4.800 have earned more than 10 millions each in 2012 for a total income oif 106 billions out of 910 billions earned by those creators.
For all creators belonging to the 1%, income from rents, royalties, Subchapter S and LLC amounted to 363 billions against 270 billions for wages. This is the largest increase in the last 27 years.

There has been a clear increase of business creations since the first SCF survey and this could be coming first from the subcontracting trend in the US industry that lead to a decrease in size of the average American firm starting in 1970 as published years ago by the Economist, second from the creation of the Subchapter S corporation in 1958 reinforced by the introduction of LLC and LLP in the 80’s.

But is that trend going to continue ?

Footnotes

[2Since a few years, the IRS has added a new classification to the 1% highest incomes that is the 0,1%.

[3http://www.kauffman.org/what-we-do/research/firm-formation-and-growth-series/the-importance-of-startups-in-job-creation-and-job-destruction ; this shows that existing companies, including publicly traded ones, are losing employment on average. IRDEME has extended those conclusions to France, UK. http://www.irdeme.org/Seules-les-entreprises-nouvelles.html

[4Hence, values extracted from answer X 3111 do not include employments in a third of fourth business (we guess their amount to be in the few % as already the second business is around 10% of the first) nor investment by entrepreneurs that are just investors and have no active role ; they represent in number some 15% and using this amount might well represent employees that our way of accounting, using percentage of ownership, mau let aside. We ‘ll tryt to improve the accuracy later but values above are likely underestimated.

[5The Department of Labor reports as employees any person working in a business even without salary whereas the Census reports only paid workers, around one third less. Those unpaid workers are family members, volunteers, etc. The SCF uses the same definition as DOL to define an employee.

[6Those are the employees declared by active entrepreneurs as a proportion of their ownership; there are non active entrepreneurs that own part of the business without being active and their part of employees is not included. The number of non active entrepreneurs being approximately 15% of the active entrepreneurs, the non publicly traded businesses in the US in 2012 (survey 2013) could represent 76,8 x 1,15=88,3 millions i.e. 62,2% of the DOL total of 142 millions.

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