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

Summary

The objective of the present study was to discuss solutions to a measurement problem which occurs
when the relationship between business ownership and income mobility is explored: as occupational
boundaries between wage earners and business owners are vague, it may influence results. In
particular, the introduction of a dual income tax system in 1992 accentuated this problem in the
Norwegian context, by giving incentives to owners of small businesses to establish widely held firms,
thereby shifting occupational status from self-employed (or other types of small businesses) to wage
earner. Since Thoresen and Alstadsæter (2008) found that certain features of the dual income tax
system in combination with certain features of human capital intensive businesses generated
organizational shifting, generating substantial income gains for the people involved, we expected
different definitions of business owner, with and without the tax-payers who shifted organizational
form, to influence results.

Our main finding is that definitions do influence results. Estimations of random effects
transition models for upward mobility and staying rich reveal stronger correlation between business
ownership, advancement and maintenance of positions at the top of the income distribution scale (only
for the decile specification) on the wide definition, which includes small businesses involved in
organizational shifting. Also, the effect from business ownership is found to be stronger for transitions
between longer time periods.

However, the positive relationship between business ownership and mobility should not be
interpreted as implying that business owners have improved their relative positions over the time
period. It mainly reflects higher income mobility of business owners, moving towards and staying at
either end of the income distribution. Even though the income positions of owners of small firms are
seen as more advantageous under the wide definition of income, the overall results mainly echo the
uncertain character of income from small businesses.

References

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Cappellari, L. and S.P. Jenkins (2002): Who stays poor? Who becomes poor? Evidence from the
British household panel survey, The Economic Journal 112, C60-C67.

Cappellari, L. and S.P. Jenkins (2004): Modelling low income transitions, Journal of Applied
Econometrics 19, 593-610.

Fairlie, R.W. (2004): “Does business ownership provide a source for upward mobility for blacks and
hispanics”, in D. Holtz-Eakin and H.S. Rosen (eds.): Public policy and the economics of
entrepreneuship, Cambridge (Massachusetts)/London: The MIT Press.

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