The impact of self-employment on labour-productivity growth: A Canada and United States comparison

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1 Caalogue no. 11F0027MIE No. 016 ISSN: ISBN: Research Paper Economic analysis (EA) research paper series The impac of self-employmen on labour-producivy growh: A Canada and Uned Saes comparison by John R. Baldwin and James Chowhan Micro-economic Analysis Division 18 h floor, R.H. Coas Building, Oawa, K1A 0T6 Telephone: This paper represens he views of he auhors and does no necessarily reflec he opinions of Saisics Canada.

2 The impac of self-employmen on labour-producivy growh: A Canada and Uned Saes comparison by John R. Baldwin and James Chowhan 11F0027MIE No. 016 ISSN: ISBN: Micro-economic Analysis Division Saisics Canada 18 h floor, R.H. Coas Building Oawa, Onario K1A 0T6 How o obain more informaion : Naional inquiries line: inquiries: Augus, 2003 This paper represens he auhors views and does no necessarily reflec he opinions of Saisics Canada. The auhors are graeful o Desmond Becksead for assisance on obaining daa on GDP per selfemployed, Jean-Pierre Maynard for helpful discussion and suggesions and o Roger Sceviour for providing Longudinal Adminisraive Daa esimaes. Aussi disponible en français

3 Table of Conens ABSTRACT...II EXECUTIVE SUMMARY... III PREFACE... IV 1. INTRODUCTION DEFINITIONS OF SELF-EMPLOYMENT GROWTH IN THE SELF-EMPLOYED IN THE 1990S: DATA COMPARISON RELATIVE SUCCESS OF THE SELF-EMPLOYED IN THE 1990S MEASURES OF LABOUR PRODUCTIVITY RELATIVE SIZE OF SELF-EMPLOYMENT IN THE BUSINESS SECTOR...16 NOMINAL GDP...16 HOURS WORKED...17 NUMBER OF JOBS LABOUR-PRODUCTIVITY GROWTH...18 NOMINAL OUTPUT PER HOUR WORKED...18 NOMINAL OUTPUT PER NUMBER OF JOBS CANADA AND UNITED STATES COMPARISON...22 DATA AND DEFINITIONS...23 COMPARISON CONCLUDING REMARKS...29 APPENDIX 1: INDUSTRY SIC DESCRIPTION...33 APPENDIX 2: CANADIAN DATA...35 APPENDIX 3: U.S. DATA...37 APPENDIX 4: SELF-EMPLOYMENT CLASSES...39 APPENDIX 5: INDUSTRY DIFFERENCES...45 APPENDIX 6: DECOMPOSITION OF CAPITAL CONSUMPTION ALLOWANCES...49 APPENDIX 7: GDP PER WORKER IN THE SELF-EMPLOYED SECTOR...52 APPENDIX 8: INDEX NUMBER DIFFERENCES BETWEEN WEIGHTED AVERAGES AND THEIR COMPONENTS...55 REFERENCES...58 Economic Analysis Research Paper Series - i - Saisics Canada 11F0027 No. 016

4 Absrac This paper examines he influence of he self-employed on he growh in labour producivy in he business secor. There has been a dramaic expansion of self-employmen in he Canadian economy over he 1987 o 1998 period. In addion, a comparison is made of Canadian and Uned Saes experiences in his area over he 1987 o 1998 reference period. This paper argues ha he expansion of he self-employed secor in Canada and he weak growh in Canadian selfemploymen ne income over he decade has resuled in downward pressure being pu on he growh in aggregae labour producivy in he business secor. In conras, he growh in he ne income of he self-employmen group in he Uned Saes has oupaced overall producivy growh in he business secor hroughou he 1990s. Almos all of he difference in labourproducivy growh beween Canada and he Uned Saes in he 1990s can be aribued o he greaer growh of self-employmen in Canada and he poorer income performance of his group. Keywords: producivy growh, self-employmen, Canada\U.S. comparison Published by auhory of he Miniser responsible for Saisics Canada Miniser of Indusry, 2003 All righs reserved. No par of his publicaion may be reproduced, sored in a rerieval sysem or ransmed in any form or by any means, elecronic, mechanical, phoocopying, recording or oherwise whou prior wren permission from Licence Services, Markeing Division, Saisics Canada, Oawa, Onario, Canada K1A 0T6. Economic Analysis Research Paper Series - ii - Saisics Canada 11F0027 No. 016

5 Execuive Summary This paper focuses on he impac of he self-employed on labour-producivy growh in he Canadian business secor. Over he decade from 1988 o 1998, self-employmen provided he majory of growh in jobs in Canada. Bu during his period, earnings per worker in he selfemployed secor fell behind hose in he business secor as a whole. This paper invesigaes he impac of hese wo evens on aggregae producivy growh. In order o measure he impac of self-employmen on labour-producivy growh, he ne income accruing o he self-employed is removed from aggregae business secor GDP o produce a residual, which measures growh in oupu in he Business-secor Apar from Selfemployed (BASE). Then oupu per hour-worked in his caegory is compared o he growh in oupu per hour-worked in he aggregae business secor he normal measure of producivy growh. Over he decade, he growh in he BASE secor cumulaive growh rae is 3.7% higher han he growh rae in he aggregae business secor using an oupu-per-job measure. I is 2.9% using an oupu per hour-worked measure. This occurs because he growh in he ne income per job (hours worked) accruing o he self-employed falls behind he growh in oupu per job (per hour worked) in he BASE secor beginning in 1994 and he resuling gap coninues over he reference decade. The increasing proporion of self-employed in he economy and he lagging growh in he ne income ha hey earned conribued o lower he growh in labour producivy in he aggregae business secor over he decade. A comparison is also made of Canada o he Uned Saes, asking wheher he differen producivy performance of he wo counries over he 1987 o 1998 period is due o differences in he self-employmen secor. The comparison shows ha he self-employmen caegory in he Uned Saes has had a significan posive effec on he growh in nominal oupu per hourworked. Over he decade, he self-employmen caegory has pulled up U.S. business-secor producivy by 4.1%; in Canada, his same caegory has provided a 2.9% drag on nominal oupu per hours worked. When he nominal oupu measures are deflaed and he difference in cumulaive growh raes is calculaed, he gap in labour-producivy growh beween he Uned Saes and Canada almos disappears. Economic Analysis Research Paper Series - iii - Saisics Canada 11F0027 No. 016

6 Preface Producivy saisics describe how efficien an economy is in urning inpus ino oupus. The mos commonly used measure is ha of labour producivy he amoun of oupu ha he economy produces per un of labour inpu (measured eher per worker or per hour-worked). The level of labour producivy will be influenced by he amoun of capal per worker ha is used, he size of firms, he organizaional and business pracices of firms, and he level of advanced echnology. Increasing he amoun of capal available o workers increases labour producivy. Larger firms are able o more fully explo economies of scale and have higher levels of labour producivy. Beer organizaional skills increase he amoun of oupu per worker. New and advanced echnologies end o increase oupu per worker. Measures of labour producivy are generally defined as oupu per hour worked in he business secor. And hey are used o evaluae he effeciveness of firms in erms of providing capal o heir workers, in exploing economies of scale, in adoping he laes advanced business pracices, in using advanced echnologies. Cross-counry producivy comparisons are used o infer differences in he relaive efficiency of businesses in differen counries. In rying o undersand he reasons behind he producivy growh experienced by he aggregae business secor, analyss ofen decompose producivy growh ino sub-componens. The mos frequenly used decomposion is an indusry breakdown. By examining he relaive producivy growh of differen indusries, analyss aemp o isolae he areas where one counry mos lags anoher. This paper has adoped a differen decomposion. Pico and Heisz (2000) have noed ha one of he defining characerisics of he Canadian economy in he 1990s was he increase in selfemploymen. Mos of he increase in workers beween 1988 and 1995 in Canada was due o an increase in self-employmen; his did no happen in he Uned Saes. In Canada, mos of his increase in self-employed consised of individuals who were no responsible for employing ohers. Cross-counry comparisons of labour producivy esimaes are implicly used o infer differences in he efficiency of Canadian businesses. However, he business populaion is no monolhic. On he one hand, his populaion consiss of goods and service facories wh large numbers of paid workers, ha require subsanial buildings, and ha use large amouns of equipmen. On he oher hand are ariss and professionals who are self-employed. These wo groups can be roughly classified as he facory and he non-facory sysem. This nomenclaure is no perfec because he laer can someimes use a fair amoun of capal and employ ohers, bu is a meaningful disincion on average. This paper herefore breaks he oal business secor oupu ino ha porion of he oupu ha accrues o he self-employed and he remainder wha migh be referred o as he facory sysem. I generaes esimaes of he growh in GDP per hour-worked in each secor and compares his o he Uned Saes. I shows ha while he growh in GDP per hour worked in he Canadian business secor as a whole has lagged ha of he Uned Saes, once he income Economic Analysis Research Paper Series - iv - Saisics Canada 11F0027 No. 016

7 accruing o he self-employed group is excluded from he equaion, he growh in labour producivy of he remainder wha migh be called he facory secor was essenially he same in he wo counries. GDP per worker in he business secor lagged ha of he Uned Saes because Canada had an increasing percenage of s workforce in self-employmen and he income per worker of he self-employed fell considerably relaive o ha of he Uned Saes. The self-employed in his sudy consis of unincorporaed individuals. They provide he bulk of he enrepreneurs in our sociey. I is emping o conclude ha was our enrepreneurs who were he cause of he producivy slowdown in he early 1990s. Bu ha is probably oo simplisic an inerpreaion. I is more likely ha in comparing oal business secor producivy growh in he wo counries in he 1990s, we are making he misake of comparing wo que differen raios even hough we are calling hem by he same name (oupu per worker), hey are capuring differen phenomenon. To undersand his, we need o consider he meaning of comparisons ha employ a measure of oupu per worker. Producivy can be measured no only as oupu per worker bu also as oupu per available worker as oupu divided by he labour force. This laer measure capures boh how effecive he economy is in ransforming labour ino oupu bu also how effecive is in providing jobs for hose members of sociey who indicae ha hey are ready o work. Such measures will differ across counries for all of he reasons ha we oulined above differences in capal inensy, in size of plans, in firms organizaional abilies, and in he use of advanced echnologies; bu hey will also differ because counries are no equally capable of offering gainful employmen o he same proporion of heir labour force. In effec, measures of GDP per capa provide one varian of his ype of measure. GDP per capa is by definion equal o (GDP/hour worked) muliplied by (hours-worked per worker) muliplied by (number of workers divided by he labour force) muliplied by (he size of he labour force divided by he populaion). This measure will grow a a differen rae han GDP/hour worked (he normal measure of labour producivy) if here is a change in any of he oher hree erms. In paricular, if he percenage of he labour force ha is employed (he hird erm) declines over a period of ime, hen GDP per capa will grow more slowly han labour producivy. This was he Canadian experience in he firs par of he 1990s. (See Wells, Baldwin and Maynard, 1999). GDP per capa in Canada grew much more slowly han GDP per capa in he Uned Saes, while he growh in oupu per worker was more similar o ha in he Uned Saes. The reason is ha unemploymen increased in Canada far more han in he Uned Saes and hus he raio of number of workers relaive o he populaion declined in Canada relaive o he Uned Saes. The measure of oupu per worker in he business secor combining boh employmen and selfemploymen ha is used in his sudy is probably also affeced by a similar phenomenon. In he early 1990s, as unemploymen grew, here were fewer opporunies for regular employmen. Resrucuring led o subsanial layoffs of many individuals who did no find regular work and is possible ha hese individuals chose no o call hemselves unemployed, bu o classify hemselves as self-employed. Similarly, hiring by firms slowed and hose enering he labour force were less likely o find employmen in normal forms of employmen. The income earned by hose choosing, or hose being forced ino self-employmen, was no zero; bu was Economic Analysis Research Paper Series - v - Saisics Canada 11F0027 No. 016

8 considerably below he income of hose who normally classified hemselves as self-employed. More imporanly, heir inclusion in he overall esimae of labour producivy mean ha he Canadian measure ook on he flavour of a measure ha capured no oupu per worker bu oupu per poenial worker and hese measures show ha Canada performed worse han did he Uned Saes because of our inabily o employ all hose who were willing o work. The difference is ha some of hese laid-off workers did find some self-employmen bu provided a remuneraion ha was considerably below ha which he self-employed had previously been able o generae. This phenomenon dragged down he measure of aggregae business-secor oupu per worker. In conras, oupu per worker in he res of he economy coninued o increase in he 1990s in Canada a abou he same pace as did in he Uned Saes. Economic Analysis Research Paper Series - vi - Saisics Canada 11F0027 No. 016

9 1. Inroducion Over he 1980s and 1990s, demographic rends and variaions in he business cycle have lead o an increasing number of individuals moving ino self-employmen. Several sudies documen he exen of hese impacs on: ransions in and ou of self-employmen (Kuhn and Schueze, 2001); he differences in he role of self-employmen beween Canada and he Uned Saes (Lin, Yaes, and Pico, 1999); and he individual enrepreneurs characerisics and previous labour marke experience ha are relaed o he likelihood of enry and ex ino self-employmen (Saisics Canada, Labour Force Updae, 1997; Lin, Pico, and Yaes, 1999). Mos of his leraure has focused on he causes of he evoluion of his phenomenon, raher han s impac on he economy. This paper examines one way in which he growh of self-employmen has affeced he performance of he economy. I focuses specifically on he impac of he self-employed on labour-producivy growh in he Canadian business secor. A comparison is also made o differences ha self-employmen have had on he relaive performance of he economies of Canada and he Uned Saes. The quesion of he influence of he self-employed on he growh in labour producivy arises and is of ineres, because of he growh in self-employmen in Canada during he recen decade. From 1990 o 1997, oal ne job growh for he enire Canadian economy was 5.0% (697,000 jobs); of his oal, approximaely one-half came from growh in he self-employed caegory. The self-employed run businesses of differen ypes. On he one hand, some generae a large amoun of GDP. They have employees and employ capal sock in he producion process. On he oher hand, ohers generae lle in he way of GDP. They hire no employees; hey use no capal excep for perhaps a compuer and a room in heir house. The impac of he growh of he self-employed on labour producivy will depend on he disribuion of he growh across hese various ypes of business. The increase in he self-employed in he 1990s has come primarily from hose who have no employees. During he period from 1989 o 1996, some 90% of self-employmen growh was own-accoun self-employed whou paid help (LFS, 1997). This group earned subsanially less han oher self-employed and less han paid workers. We show below ha he growh in selfemploymen ha was experienced in Canada during he early 1990s was an imporan facor conribuing o he sagnaion of aggregae labour-producivy growh in he Canadian business secor. Producivy growh is ypically undersood o be a key facor conribuing o a counry s sandard of living. Labour producivy is a general measure used o follow changes in economic performance. An improvemen in producivy can occur because of increases in producive efficiency brough abou by research and developmen, he adopion of new echnologies, innovaive managemen, and increases in human capal. Saisics Canada s labour-producivy program provides esimaes ha measure growh in real oupu per un of labour inpu, measured in erms of hours-worked for he aggregae business secor and s compose indusries. This measure of labour producivy is broad in scope and when decomposed ino producivy growh a he indusry level is ofen used o examine efficiency differences across indusries. Economic Analysis Research Paper Series Saisics Canada 11F0027 No. 016

10 In conras, his paper decomposes he aggregae business secor in a differen way. I akes oal GDP and hen removes he ne income of he self-employed from he oal oupu produced and he number of self-employed workers from oal employmen. Because of he imporance of selfemploymen during he 1990s, we ask wha would have happened o labour producivy if selfemploymen had no grown so rapidly and if he earnings of he self-employed had no fallen behind hose of paid workers. The invesigaion excludes he public secor and non-business secors of he economy and includes only he business secor. In places, he self-employed will be broken ino non-farm and farm self-employed componens because he farm caegory is subsanially differen from he res of he economy. This paper no only invesigaes he influence of self-employmen on labour-producivy growh in he business secor, bu also explores various measures of labour producivy and definions of self-employmen. Two measures of labour producivy will be examined; he firs uses hours worked as a measure of labour inpu; he second uses number of jobs. These measures will be discussed in more deail below. Finally, a Canadian and Uned Saes comparison will also be made in his paper. Daa series have been consruced ha are qualaively idenical for each of he caegories presened. This comparison will help o highligh one possible explanaion of why labour-producivy growh in he Canadian business secor declined relaive o he Uned Saes over he 1987 o 1998 period. The paper is srucured in he following manner. Secion 2 briefly defines he concep of selfemploymen used in his sudy. Secion 3 discusses available daa sources ha can be used o measure he growh of self-employmen. Secion 4 describes he relaive performance of he selfemployed. Secion 5 oulines he measures of labour producivy used and describes he daa sources employed. Secion 6 compares he growh in he share of ne income of he selfemployed and compares o he growh in heir share of hours worked. Secion 7 presens an analysis of he changing rend in labour producivy over he decade for he various sub-secors of he business secor. The Canadian and Uned Saes labour producivy comparison is made in Secion 8. Finally, Secion 9 presens some concluding remarks. Economic Analysis Research Paper Series Saisics Canada 11F0027 No. 016

11 2. Definions of self-employmen A Saisics Canada, wo separae definions of self-employmen are used. 1 Firs, he Labour Force Survey (LFS) defines wo broad caegories of workers: paid employees and he self-employed ha is, individuals who work for ohers and persons who work for hemselves. 2 In he oal economy, paid employees include boh privae and public workers. 3 Paid employees fulfil he following creria: hired by an employer, paid a wage or salary, do no own heir own business, have EI premiums and income ax deduced a source, and are subjec o labour legislaion regarding such hings as holiday pay and oher benefs (Saisics Canada, Labour Force Updae, 1997: p.5). The LFS definion of he self-employed is a worker who does no fulfil his crerion. In he LFS, he self-employed definion includes working owners of incorporaed businesses, working owners of unincorporaed businesses and oher self-employed, and unpaid family workers. This represens a broad definion of self-employmen because includes boh incorporaed and unincorporaed owners of businesses (Figure 1). Figure 1: Labour Force Survey Employmen by Class of Worker Percenage of Toal Economy, Self-employed Incorporaed Self-employed Unincorporaed Working in Family Business whou Pay Public Employees Privae Employees Source: Labour Force Updae The Self-employed, Saisics Canada, See Secion 3 for furher elaboraion on he daa sources and a comparison of employmen esimaes by caegory across he various Canadian daa sources. 2 The LFS is a household survey ha is conduced monhly for he purpose of collecing informaion on labour force saus and major labour marke rends. The sample colleced is of individuals who are represenaive of he civilian, non-insuionalized populaion 15 years of age or older in Canada s en provinces (Saisics Canada, 1997). 3 A privae-secor paid employee works for a privae firm or business as an employee. Public employees work for federal, provincial, or local governmens, for a governmen agency, crown corporaion, or a governmen funded public insuion such as a school or hospal (Saisics Canada, 1997). Economic Analysis Research Paper Series Saisics Canada 11F0027 No. 016

12 In he second case, he Sysem of Naional Accouns (SNA) includes only unincorporaed selfemployed in s definion of he self-employed. Incorporaed business owners are no included in he definion of he self-employed since working owners of an incorporaed business are considered o be employees of he corporaion. 4 The self-employed incorporaed individuals are included in he paid workers secor in he SNA. In order o esimae he producivy of employed as opposed o self-employed workers, esimaes of he earnings conribuion ha is made o nominal GDP by he laer are needed. Since an approximaion o his conribuion exiss in he SNA for he self-employed when defined as unincorporaed, 5 is his definion for he self-employed ha is used in his paper Growh in he self-employed in he 1990s: Daa comparison There are hree Canadian daa sources ha can be used o examine he conribuion made by selfemploymen o changes in oal economy employmen. The firs is he Labour Force Survey. The second is he Sysem of Naional Accouns ha relies primarily on he Labour Force Survey, bu also uses longudinal adminisraive ax daa. The hird source is ax daa (Longudinal Adminisraive Daa) ha uses a sample of ax filers eher employed or self-employed. Employmen couns from each of hese caegories are compared in Table 1. The SNA esimae of he self-employed in Table 1, which includes only unincorporaed selfemployed, is lower han he LFS esimae of he self-employed, which includes boh selfemployed unincorporaed and incorporaed workers. The growh in he SNA self-employed is also lower han he LFS concep ha includes boh he incorporaed self-employed and unincorporaed self-employed concep o define self-employed. The LFS uses a main job concep o make he class-of-worker disincions for every person in he survey in order o produce an employmen number. The LFS defines main job as he job or business involving he greaes number of usual hours worked (Saisics Canada, 1997). The LFS esimaes for number of jobs and hours-worked are based on his main job or primary employmen concep, and do no include secondary jobs or he hours worked in hose esimaes. The SNA esimaes are differen because he SNA uses a job concep. While benchmarking o he LFS esimaes, he SNA adjuss he esimaes o include muliple-job holders and individuals ha were ou-of-scope for he LFS populaion. However, he SNA does no include individuals as self-employed ha repor ha hey were no a work and no paid over he reference period hese persons are considered unpaid absenees. 7 4 The self-employed ha are incorporaed business owners are no eligible for employmen insurance coverage/benefs (Saisics Canada, Labour Force Updae, 1997: 5). 5 This is he case because he daa sources ha feed he SNA are no deailed enough o disinguish self-employed incorporaed individuals from oher incorporaed businesses. The primary source for self-employed unincorporaed is Taxaion Saisics derived from a sraified sample of he Canada Cusoms and Revenue Agency s T1 reurns (Saisics Canada, 1990). For more deail on daa sources, see reference Saisics Canada, The unpaid family workers class will be included wh he self-employed unincorporaed esimaes for his sudy; however, his should no affec he resuls significanly since unpaid family workers, for hours worked, only accouned for 6.14% in 1987 and 3.23% in 1997 of he enire self-employed unincorporaed class. 7 See Appendix 4 Secion 3 for furher deails on unpaid absenees. Economic Analysis Research Paper Series Saisics Canada 11F0027 No. 016

13 For comparaive purposes, esimaes of he self-employed derived from he Longudinal Adminisraive Daa (LAD) ax file are also presened. 8 On he LAD file, self-employmen, ne income is defined as he sum of all ne income earned from self-employmen, where sources of self-employmen income include: business, professional, commission, farming, and fishing (Saisics Canada, 1998; 61). 9 For each of hese caegories, gross income is also repored, where gross income is he enire income of he axfiler s unincorporaed operaion, before expenses and coss are deduced. Boh he self-employed ne and gross income esimaes from LAD can be used o obain esimaes of he employed and he unincorporaed self-employed. To do so, we classify each individual as eher employed or self-employed. And since some individuals repor boh employmen and self-employmen income, a rule mus be devised o assign each individual o a caegory. We employ wo separae rules in Table 1. In he firs case, self-employmen is defined o occur when ne self-employmen income is greaer han wages (T4 earnings). This mehod, herefore, is in he spir of he LFS in ha classifies an individual o his/her main source of income. Bu his measure differs from he LFS definion of self-employmen in several ways. I differs firs, in he way ha he daa are colleced, since ax reurns are colleced a one ime during he year and are represenaive of yearly acivy, 10 whereas he LFS is colleced monhly and uses a sixmonh sample roaion design. Also he person reporing he informaion will differ and his will also be responsible for differences in he esimaes across samples. For example, ypically he individual filing a T1 reurn confirms he informaion on he reurn, whereas he LFS uses a proxy reporing approach, where he reference person repors he informaion for all members of he household. 8 The LAD is a random sample of 20% of he T1 Family File. For more deail on he developmen of his file, see reference Saisics Canada In 1987, income from limed or non-acive parnerships may have been included in his variable when was par of self-employmen business income. However, afer his period, from 1988 o 1998 only he axfiler s proporion of acive self-employmen parnership income is included (Saisics Canada, 1998). 10 I is imporan o noe ha unil 1994, reporing of self-employmen income was on a fiscal year basis and he fiscal year end was he axaion year for reporing his income. Beginning in 1995, mos individuals are required o repor self-employmen income on a calendar year basis (Saisics Canada, 1998: 17). Economic Analysis Research Paper Series Saisics Canada 11F0027 No. 016

14 Economic Analysis Research Paper Series Saisics Canada 11F0027 No. 016 Esimaes of he self-employed in he 1990s Table 1. Number of Jobs Comparison Year Toal economy Sysem of Naional Accouns (SNA) 1 Labour Force Survey (LFS) LAD 7 All public and privae employees Business Self-employed 3 Toal secor 2 economy 4 All public and Self-employed 5 privae employees Labour marke 6 Ne self-employmen Income > Wages Gross SE Income > Zero ,586,131 11,330,399 9,793,355 1,255,732 12,318,600 10,622,900 1,695,700 13,057, ,450 1,557, ,024,757 11,738,227 10,171,627 1,286,530 12,709,800 10,938,100 1,771,700 13,392, ,150 1,696, ,333,635 12,016,792 10,434,298 1,316,843 12,986,000 11,183,300 1,802,700 13,759,750 1,003,250 1,775, ,416,530 12,080,966 10,442,217 1,335,564 13,084,600 11,242,000 1,842,600 13,884,800 1,010,750 1,819, ,177,410 11,826,953 10,137,605 1,350,457 12,851,500 10,964,200 1,887,300 13,732,200 1,013,950 1,858, ,084,495 11,703,913 10,005,441 1,380,582 12,757,900 10,838,800 1,919,100 13,732,400 1,064,400 1,930, ,229,118 11,745,599 10,109,421 1,483,519 12,858,700 10,831,800 2,026,900 13,808,200 1,124,850 2,023, ,469,903 11,955,953 10,340,865 1,513,950 13,109,900 11,074,500 2,035,400 13,976,550 1,189,600 2,136, ,692,847 12,180,961 10,554,627 1,511,886 13,357,900 11,260,600 2,097,300 14,180,500 1,241,150 2,260, ,816,026 12,218,666 10,765,446 1,597,360 13,464,400 11,295,200 2,169,200 14,333,600 1,300,800 2,355, ,113,291 12,436,497 11,112,352 1,676,794 13,773,600 11,420,000 2,353,600 14,686,000 1,366,550 2,439, ,448,168 12,698,909 11,459,574 1,749,259 14,138,500 11,713,400 2,425,100 14,937,300 1,380,350 2,453,100 1 These esimaes are generaed from LFS esimaes; hey are adjused for he producivy esimaes o include LFS ou of scope. 2 The Business Secor coun includes only privae employees and self-employed. 3 The self-employed componen includes boh Non-farm and Farm self-employed unincorporaed, and unpaid family workers. 4 The LFS couns include boh full-ime and par-ime employmen. 5 The LFS self-employed componen includes boh incorporaed and unincorporaed self-employed; own-accoun and wh paid help; and unpaid family workers. 6 Toal Economy Labour Paricipaion: he number of individuals reporing marke earnings on he T1 Individual Tax Reurn (T4, oher employmen income, or self-employmen income). 7 The Longudinal Adminisraive Daabase couns do no include incorporaed self-employed in he self-employmen coun.

15 A second measure of self-employmen using he LAD is calculaed by aking all ax filers whose gross self-employmen income was greaer han zero. This esimae is represenaive of all of he individuals filing T1 reurns who have any self-employmen acivy. This is a very broad measure of self-employmen because does no ake ino consideraion he concep of main job. All hree of he esimaes show ha self-employmen has gone up considerably over he early par of he 1990s. The SNA esimaes show a 15% increase in he oal number of jobs in he business secor beween 1987 and 1998, bu self-employmen increases by 39%. The LFS indicaes ha self-employmen increased by 43% over he same period. Esimaes of selfemploymen from he ax records using he main income concep increase by 48%. 4. Relaive success of he self-employed in he 1990s While he self-employed were growing in he 1990s, heir earnings were falling behind paid workers during his period. The LAD ax daa can be used o invesigae he success of selfemploymen over he 1990s by examining he increase in earnings per employee for boh all employees and he increase in he ne income received by he self-employed (Figure 2). In his graph, he self-employed are defined o be ax-filers wh self-employmen ne income greaer han wages. From 1989 o 1994, average personal labour income is fla and slighly declining for oal selfemploymen (NTSE), whereas he average oal economy labour income measure (TELP) increases seadily over he period. A measure for oal earnings less hose of he self-employed is consisenly above he TELP measure. The growing gap beween he TELP minus NTSE secor and he TELP secor is due o he fla growh of he NTSE secor hrough he period Figure 2: Longudinal Adminisraive Daa Cumulaive Growh Comparison Across Secors by Class of Worker 145 Average Personal Income per Worker Index (Base 1987 = 100) Year Toal Economy Labour Paricipaion (TELP) TELP minus NTSE Toal Self-employmen Ne Income greaer han Wages (NTSE) Economic Analysis Research Paper Series Saisics Canada 11F0027 No. 016

16 The slowdown in earnings growh did no come from one paricular group of he self-employed. To see his, we examined five groups ha are idenified on he LAD daabase professionals, farmers, fishermen, commission earners, and businesses. The ne income per person in each of hese caegories is presened in Figures 4 and 5. The self-employed business-income earners mainly drove he fla growh of oal self-employed average personal labour income, from 1989 o The size of his group increased over he period from 54.8% o 65.2% of he oal self-employed (Figure 3). The proporion of earners wh commissions increased slighly over he period. The farming self-employed group declined from 23.7% of he oal self-employed o 14.0%. The fall in farming as a proporion of he oal self-employed was caused by a dramaic decline in he number of farmers, wh self-employmen ne income greaer han wages, no by a decline in farming acivy. 11 The proporion of hose reporing fishing earnings declined gradually over he period from 4.1% o 1.9% of he oal self-employed. The share of professionals reporing self-employed earnings remained relaively consan over he period. The average personal labour income of professionals over he period was significanly above he oher self-employmen caegories (Figure 4). Their average income increased from $50,489 in 1987 o $70,355 in This group exers a subsanial upward pull on average income of oal self-employmen. Figure 3: Incidence of Self-employed Caegories Caegories as a Proporion of he Toal Selfemployed (Percenage) Year Business Commission Farming Fishing Professional 11 The number of self-employed farmers wh ne income greaer han wages declined 13% over he period, where as he farmers wh gross income greaer han wages only declined 2% from 1987 o Economic Analysis Research Paper Series Saisics Canada 11F0027 No. 016

17 Figure 4: Longudinal Adminisraive Daa Average Personal Incomes of Professional Self-employed 80,000 Average Personal Income (Selfemploymen Ne Income Greaer han Wages) 70,000 60,000 50,000 40,000 30,000 20,000 10, Year Toal Self-employed Professional Average Personal Income (Self-employmen Ne Income Greaer han Wages) Figure 5: Longudinal Adminisraive Daa Average Personal Incomes of he Self-employed by Caegory Year Toal Self-employed Business Commission Farming Fishing Average income for he business-income earners fell from 1990 o 1992, and only slighly increased over he remainder of he period (Figure 5). The business caegory is essenially a cach-all caegory on he T1 General ax reurn, since is no as clearly defined as he oher self-employmen caegories. This group is que diverse ranging from ariss o rade-persons. This group is he main conribuor o he low growh in oal self-employmen earnings per person over he period. The average earnings of commission earners increased seadily over he period, excep for declines in 1995 and Farm and fishing self-employed average incomes dipped o a low in he recession years 1990 o 1992, and hereafer showed a sligh improvemen. Economic Analysis Research Paper Series Saisics Canada 11F0027 No. 016

18 175 Figure 6: Cumulaive Growh Raes of Jobs by Class of Worker Caegory Index (Base 1987 = 100) Year All paid workers jobs Self-employed no paid workers Toal Self-employed Self-employed paid workers Unpaid family worker jobs The slowing in he growh raes of he ne earnings per worker of he self-employed is parially a reflecion of he self-employmen secor s characerisics. The Labour Force Updae (1997) repors ha compared o employees, he earnings of self-employed peaked in 1989 and fell in he early 1990 s. 12 They argue ha his was parly due o he composion of occupaions of he selfemployed. An increasing percenage of he self-employed were working in service and arisic occupaions han in high-paying managerial jobs. 13 During he 1990s, several changes in he composion of he labour force occurred. Firs, he growh in oal self-employmen subsanially oupaced ha of paid workers (Figure 6). Second, he self-employed whou employees grew more quickly han he self-employed who hemselves hired oher workers. The own-accoun grew by 65.4% over he 1987 o 1998 period, and accouned for almos 80% of he oal self-employed by This is in conras o he selfemployed wh employees and unpaid family workers whose job numbers declined over he period. A picure of he success and failure of he various groups of he self-employed can be derived from he Survey of Consumer Finance (SCF) and he Survey of Labour and Income Dynamics (SLID). These surveys allow us o calculae he ne income of wo separae groups of he unincorporaed self-employed hose who have employees and hose who work on heir own accoun. The laer accouned for 107% of he oal increase in unincorporaed self-employed, during he period from 1987 o 1997 (Source: SCF). More imporanly, own-accoun self-employed was far less successful han mos oher workers. Over he period, own-accoun self-employed earnings ranged beween 68% and 53% of he average received by paid workers, wh he mos dramaic differences appearing in he lae 1990s 12 Recall ha he LFS definion of self-employed includes incorporaed individuals, whereas he Sysem of Naional Accouns definion being used in his paper uses only unincorporaed individuals in he self-employmen definion. 13 I is also noeworhy ha over 35% of self-employed worked 50 or more hours per week in 1996, and ha he average work week was ypically longer for he self-employed, ranging beween approximaely 16% o 20% longer han employee workers over he 1987 o 1997 decade (LFS Updae, 1997). Economic Analysis Research Paper Series Saisics Canada 11F0027 No. 016

19 $60,000 Figure 7: Average Remuneraion, By Class of Worker $50,000 Curren Dollars ($) $40,000 $30,000 $20,000 $10, Year Paid Workers (SCF) SE Employers (SCF) SE Own-accoun (SCF) Toal SE (SCF) Paid Workers (SLID) SE Employers (SLID) SE Own-accoun (SLID) Toal SE (SLID) Source: Saisics Canada, Survey of Consumer Finances ( ), Survey of Labour and Income Dynamics ( ). In SCF, labour informaion is colleced for persons 15 years old and over. In SLID, labour informaion is colleced for persons 16 o 69 years old. (Figure 7). Furher, own-accoun self-employed earned on average only abou 50% of he percapa ne earnings received by self-employed wh employees. The class of worker caegories can be furher broken down ino main and oher job groupings, since he SNA esimaes include muliple jobholders. Appendix 4 Secion 2 invesigaes wheher or no persons aking on second jobs were driving he growh in self-employmen. The appendix shows ha he growh of self-employed wh no paid workers, which is he primary group driving oal self-employmen growh, increased a he same rae for boh main and oher job caegories, and ha here was no subsanial difference beween hese wo groups. Thus, he relaively low average remuneraion of he self-employed own accoun group was no due o he growh of self-employmen as a secondary source of earnings. The expansion by a group of he self-employed, who suppored no oher workers in he economy, and who hemselves received a ne income ha was low and falling relaive o boh oher self-employed and o paid workers, would have had a downward impac on various measures of economic performance. In he nex secion, esimaes of he impac of he growh of he self-employed on producivy performance are derived. Economic Analysis Research Paper Series Saisics Canada 11F0027 No. 016

20 5. Measures of labour producivy Labour producivy is calculaed as he raio of oupu o a measure of labour inpu: Y LP =, where Y is oupu and N is labour inpu. 14 Oupu is measured as he oal value of N goods and services ha are produced in he economy capured eher by he expendures ha are made or by he incomes ha are paid o all facors of producion. Measures of labour inpu are capured generally by hours-worked. The measure of oupu ha will be used in his invesigaion is nominal Gross Domesic Produc (GDP) a basic prices, as defined by he Sysem of Naional Accouns producivy program. 15 For his exercise, only he business secor will be used. The business secor excludes all nonbusiness acivies as well as he implic renal value of owner-occupied dwellings. The nonbusiness secor includes insuions such as governmen, educaion, hospals and religious organizaions. 16 Two separae measures of labour producivy will be examined here. The firs uses hours worked and he second uses number of jobs as a measure of labour inpu. The number of hours-worked measure includes he oal hours a person spends working, wheher paid or no. 17 The number of hours worked is he value of he annual average for all jobs muliplied by he annual average hours worked in all jobs (Saisics Canada, 1997). The oal number of jobs measure for he business secor includes employee jobs for incorporaed businesses, employee jobs for unincorporaed businesses, self-employmen, and unpaid family 14 The oupu per labour inpu producivy measure reflecs he compose effec of many influences. Such influences include, bu are no limed o, changes in echnology; capal invesmen; uilizaion of capacy; organizaion of producion; and he characerisics and effor of he work force. 15 GDP a basic prices is equal o GDP from he inpu-oupu ables a facor cos plus indirec axes on producion minus subsidies on producion. For a more deailed definion see Saisics Canada 2001 (156). The Uned Saes uses a marke price measure of GDP. I is differen from he Canadian basic price measure of GDP in ha ne indirec axes on final producs are excluded from he marke price measure o ge basic prices. An example of an indirec ax on final goods or services is he Goods and Services Tax (GST). The Canadian GDP from 1987 o 1996 is based on he 1980 Sandard Indusrial Classificaion (SIC) and from 1997 o 1998 on he Norh American Indusry Classificaion Sysem. These classificaion sysems provide esimaes ha are no subsanially differen a he aggregae level. The Uned Saes GDP esimaes are based on he SIC 1987 sysem. Boh Canadian and Uned Saes GDP esimaes include capalized sofware. 16 Appendix 1 has a deailed break down of indusries. The non-business indusries 231 o 235 are non-prof organizaions and 236 o 243 are governmen; all of hese indusries are omed in his analysis and indusry 201 Owner occupied dwellings is also excluded from he calculaion of secor aggregaes. For reference, he business secor in 1992 accouned for 77% of Canadian oal GDP. 17 In general, he oal number of hours worked includes regular and overime hours, breaks, ravel ime, raining in he workplace and ime los in brief work soppages where workers remain a heir poss. Toal number of hours worked does no include ime los due o srikes, lockous, annual vacaion, public holidays, sick leave, maerny leave or leave for personal needs (Saisics Canada, 1997: 10). Economic Analysis Research Paper Series Saisics Canada 11F0027 No. 016

21 jobs. 18 The number of jobs measure couns muliple jobholders more han once; simply, jobs are couned no persons. The hours worked concep is he one used in Saisics Canada s Producivy Measures program in he calculaion of labour producivy and he number of jobs measure is included here for comparaive purposes. The hours-worked measure has radionally been used, because he number of jobs measure misses he impac of non-sandard work arrangemens (for example par-ime, emporary and self-employed). 19 As non-sandard work arrangemens rise, he number of jobs will increase bu he number of hours-worked may no increase a he same rae. The hours-worked labour inpu measure is more sensive o he increasing polarizaion in he disribuion of jobs, beween long- or shor-hour jobs (Saisics Canada, 2001). The number-ofjobs measure does no capure he increasing variaion in work arrangemens, whereas he hoursworked measure picks up he heerogeney in he various ypes of non-sandard jobs ha exis. In nominal erms, he esimae of GDP a basic prices is calculaed as follows: GDP = LI + NIUB + OS + ITLS (1) where LI = WS + SLI, (2) and GDP = gross domesic produc a basic prices; LI = labour income; WS = wages and salaries; SLI = supplemenary labour income; NIUB = ne income, unincorporaed business; OS = operaing surplus; and ITLS = indirec axes on producion less subsidies on producion. These facor incomes a curren prices are furher composes of oher componens. Labour income is made up of wages and salaries and supplemenary income. Wages and salaries are made up of all paymens o labour before deducion of axes and conribuions o social secury. Paymens include paymens-in-kind, commissions, ips, bonuses, direcor s fees, and axable allowances. Supplemenary income covers ems such as unemploymen insurance, pension funds, and oher social insurance schemes; ems ha employers would conribue on behalf of he employee (Saisics Canada, 1989). The ne income of unincorporaed businesses includes a reurn o he owners for heir enrepreneurship and risk and a reurn for heir labour inpu. Boh agriculural and non-agriculural proprieors are included in his, as are all professionals such as docors and lawyers, and he ne ren of persons from residenial and non-residenial propery. Operaing surplus includes business profs before axes and dividend disribuion, invesmen income oher han ne renal income of persons, capal consumpion allowances and an 18 Unpaid family jobs are ypically found in agriculure and reail rade secors and oher similar secors where family firms are imporan. 19 Non-sandard work includes par-ime work, emporary work, muliple jobs and self-employed whou paid employees (Krahn, 1995). Suner (1993) also includes shif-work in he definion of non-sandard work. Economic Analysis Research Paper Series Saisics Canada 11F0027 No. 016

22 invenory valuaion adjusmen. 20 Finally, indirec axes on producion less subsidies on producion are included o ge esimaes for GDP a basic prices. 21 I should be noed ha boh he labour and he operaing surplus could be separaed ino wo componens hose arising from acivies by he incorporaed (wh an INC suffix) and he unincorporaed secor (wh an UNINC suffix). GDP = LIINC + LIUINC + NIUB + OSINC + OSUINC + ITLS (3) The conribuion of he unincorporaed secor hen consiss of he ne income earned by unincorporaed business, he wages and salaries ha unincorporaed business pay o employees if hey have any, and any operaing surplus ha is no repored as par of ne income any depreciaion of capal and ineres paymens. In wha follows, he impac on producivy growh of he self-employed will be examined by recalculaing he numeraor and he denominaor of he oupu per worker measure. In he numeraor, he ne earnings accruing o he unincorporaed business secor is removed from he oal GDP measure. In he denominaor, he hours worked of unincorporaed self-employed are removed from oal hours worked. In doing so, wo disinc economic secors are creaed (see Figure 8). These are: he Selfemployed secor, whose sub-componens are non-farm self-employed and farm self-employed, and he remainder of he commercial secor wha is referred o in his paper for exposional purposes as he Business-secor Apar from Self-employed (he BASE secor). The BASE secor consiss mainly of he incorporaed porion of he economy, where paid employees work in wha can be described as goods and services facories. The oppose is he self-employed porion of he economy which, as has been demonsraed, consiss mainly of unincorporaed enrepreneurs working on heir own in a non-facory environmen. In summary, we ask wha he effec is of removing he ne income ha is aribued o he unincorporaed self-employed from GDP when calculaing labour producivy. In oher words, we remove ha par of GDP ha accrues in he way of ne income o he self-employed and ask wha rajecory he remainder follows. Oupu per worker is equal o a weighed average of he ne income accruing o self-employed workers and oupu per worker in he BASE secor, ha is: GDP / EMP = W1 *( BASE / PROD ) + W2 *( NIUB / SEMP) (4) 20 In operaing surplus, dividends and ineres income are regarded as re-disribuions of income or ransfers of income raher han income originaing in he receiving indusry. Also he capal consumpion allowances (CCA) and invenory valuaion adjusmens (IVA) are included in he BASE secor (operaing surplus caegory) as aggregae adjusmens for all indusries, as opposed o being broken ou beween he various facor incomes. This reamen of CCA and IVA is he same for he Uned Saes daa. See Appendix 6, for a parial decomposion of operaing surplus across he incorporaed and unincorporaed secors. 21 The proporion of he ne income of unincorporaed business (NIUB) ha is due o subsidies canno be isolaed from he facor income NIUB. This is rue for he non-farm and farm self-employed. Thus, self-employmen income for boh Canada and he Uned Saes will have an upward bias equal o his subsidy componen. Economic Analysis Research Paper Series Saisics Canada 11F0027 No. 016

23 where oal employmen (EMP) is equal o producion worker employmen (PROD) and selfemploymen (SEMP), ha is: EMP = PROD + SEMP (5) and he weighs (W 1,W 2 ) are jus he raios of producion worker and self-employmen o oal employmen, ha is: W = PROD EMP and W 2 = SEMP / EMP (6) 1 / In order o assess he impac of self-employmen on he growh in on overall labour producivy, we remove ha porion of GDP ha is a join reurn o hours-worked by he self-employed and he profs ha hey earn as a resul of heir risk-aking (NIUB) from business-secor GDP and calculae he producivy of he BASE secor. We are ineresed in invesigaing wheher once his componen is removed, producivy growh in he remainder (referred o here as he BASE) is higher han he oal business-secor producivy growh rae. I should be noed ha we are no removing all of he GDP ha is creaed by his self-employed group (see equaion 3). And herefore, he incorporaed as opposed o unincorporaed dichoomy ha we have referred o above is no perfec, since he employees of unincorporaed businesses are included in he BASE secor. In oher words, he wages and salaries, hours worked, and number of jobs of he paid workers in he unincorporaed secor are included in he BASE secor in our calculaions. 22 Bu he earlier secion of his paper ha oulines he growh of he selfemployed in he Canadian economy in he 1990s indicaes ha his omission is probably no serious for he inerpreaion of our resuls. For almos all of he increase in he self-employed over he period being sudied came from ha group of he self-employed who had no employees and herefore heir ne income probably capures almos all of heir conribuion o GDP. In order o es wheher hese omissions maer for he conclusions of his paper, we move from he ne income per self-employed concep o GDP per worker in Appendix 7 for he mos imporan segmen of he self-employed secor he business group of self-employed. And when correcions are made o bring he measure of ne income per self-employed worker closer o GDP per worker, he resuls are unchanged. 22 We are presenly examining he feasibily of using ax files o remove he remaining componen. Economic Analysis Research Paper Series Saisics Canada 11F0027 No. 016

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