Corporate Profits Soar, Small Businesses’ Income Stagnates
Ed Dolan | Jun 03, 2013 02:01AM ET
Americans have long seen small businesses as the heart and soul of their economy, but small firms have not fared well in recent years. Corporations, in contrast, seem to be on a roll, with profits and stock prices soaring to record highs. Is small business really in decline, and if so, what should we do about it?
First, some data
One striking indication that small business is falling behind is the divergence between corporate profits and proprietors’ income. The trend is evident in data, shown in the following chart, that were released last week by the Bureau of Economic Analysis.
It is true that the two series in the chart correspond only approximately to the popular distinction between big and small business. Proprietors’ income includes the current income of unincorporated businesses that have the legal forms of proprietorships, partnerships, and tax-exempt cooperatives. It does not perfectly match up with small firm size because some small firms are incorporated and some proprietorships, partnerships, and cooperatives are large. Also, proprietors’ income is not, in an economic sense, a pure measure of the profits of small businesses, since it includes the imputed income of small business owners who live off the net proceeds of their enterprises without paying themselves a salary or interest on funds they have loaned to their firms.
Even given these caveats, though, the chart is strongly suggestive. It shows that corporate profits reached an all-time high of 12.74 percent of GDP in the fourth quarter of 2011. Although profits for Q1 2013 were down slightly to 12.30 percent of GDP, that is still higher than they had ever been before their peak of two years ago. Meanwhile, proprietors’ income was up slightly to 7.9 percent of GDP, but it remains well below its all-time high of 8.8 percent in 2004. Before the early 1990s, the two forms of income rarely differed by as much as two percent of GDP.
At the same time as corporate profits have risen faster than proprietors’ income, large firms have been growing faster than small ones. The next two charts show total employment by firm size over the past twenty years.
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Naturally, if big business accounts for a growing share of employment, we would also expect it to account for a growing share of profits. However, a closer examinaton of the underlying data shows that the growing employment share of large firms explains only about half of the trend in the ratio of corporate profits to proprietors’ income over the past twenty years. It seems that big businesses are not only growing in size, but are generating more profit per worker as they do so.
So what ails small business?
What exactly is behind the apparent stagnation of small business? One way to find out would be to ask small businesses themselves. That is something the National Federation of Independent Businesses does on a regular basis. The next chart, taken from the latest issue of the NFIB publication Original post
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