Income Mobility of Owners of Small Businesses when Boundaries between Occupations are Vague

CESifo Working Paper No. 2633

Income Mobility of Owners of Small Businesses
when Boundaries between Occupations are Vague

Abstract

Ownership of small businesses can facilitate upward mobility through the income hierarchy
and help individuals maintain a place at the higher end of the income distribution hierarchy.
This paper compares the positional stability of owners of small businesses with that of wage
earners, arguing that describing the relative position of different occupations faces definitional
challenges. For instance, the Norwegian dual income tax system encourages owners of small
businesses to establish widely held firms, with themselves as employees, because it reduces
the tax burden and increases post-tax income. Descriptions of income distribution mobility of
different occupations are therefore in danger of being misleading if such occupational
measurement problems are not taken into account. I discuss in this paper the income mobility
of owners of small firms in Norway 1993-2003 by estimating income transition models for
different definitions of occupational status. Business ownership facilitates upward mobility
and helps owners maintain a place at the top of the income distribution scale, and wider
definitions of what counts as a small business owner enhance these correlations. However, as
the paper shows, business owners are more mobile than wage earners and therefore
overrepresented at the lower and higher ends of the income distribution ranking, irrespective
of definition.

JEL Code: D31, H25, H30.

Keywords: income mobility, dual income tax, income of owners of small businesses, random
effects model.

Thor O. Thoresen
Research Department
Statistics Norway
P.O. Box 8131
Norway - 0033 Oslo
[email protected]

This work has been supported by Grant 158143/S20 from the Norwegian Research Council.
In the preparation of this study I benefited from a research stay at CES in Munich; the
generous hospitality of the institute is gratefully acknowledged. I would also like to thank
Bârd Lian and Elin Halvorsen for their assistance in the preparation of this study, and Peter
Lambert for his comments to an earlier version of the paper.

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