Labor Income

Labor Income (YL)
Earnings (YLE)
Fringe Benefits (YLF)
Self-Employment Income (labor component) (YLS)

Overview

Total labor income is estimated from NIPA and the age profile is estimated using individual and household surveys. The methods outlined in this section assume that survey data on employee compensation are available, ideally from a nationally representative survey. Estimating the labor income of the self-employed is difficult for two reasons. First, entrepreneurial income or the "profits" of a family business or farm must be allocated between returns to labor and returns to capital. Second, the return to labor must be allocated among family members who often do not explicitly receive compensation including unpaid family workers.

Defining labor income

Labor income is defined as all compensation that is a return to work effort; including labor earnings, employer-provided benefits, taxes paid to the government on behalf of employees, and the portion of entrepreneurial income which is a return to labor. The remaining share of entrepreneurial income is designated as a return to capital, with the share of entrepreneurial income allocated to capital assumed to be the same for each age of worker.

Compensation of employees includes the value of social benefits provided to workers, including payments to retirees. In principle, compensation should include the imputed value of providing the social benefit to employees. For example, if employees will receive unfunded pension benefits in the future, current compensation should include the imputed value of purchasing an annuity that would provide the future pension. In practice, this is often not possible and the payment of social benefits to current or former workers is counted as current compensation and allocated to current workers.

Labor income includes compensation to those on paid leave (vacation and sick leave) and no adjustment is required. The value of other activities, such as childrearing and other in-home activities, which do not produce market goods or services, is also excluded from labor income calculations.

Aggregate Control for Labor Income

Total labor income is estimated from National Income. Using the terminology of the 1993 UN System of National Accounts, labor income consists of three components:

the compensation of employees
labor's share of the operating surplus of unincorporated enterprises (also known as mixed income or entrpreneurial income or proprietors' income)
labor's share of taxes on net production and on imports (also known as indirect taxes) less business subsidies

The compensation of employees consists of wages and salaries and employers' social contributions.

In the absence of information to the contrary, we assume that two-thirds of the operating surplus of unincorporated enterprises is labor income.

Net taxes on net production and on imports is borne by workers in the form of reduced compensation, by owners of assets in the form of reduced asset income, and by consumers in the form of higher prices. Net taxes means taxes net of business subsidies. Total labor income is increased by labor's share of net taxes on production and on imports. (In the NT Flow Account, the higher labor income of each age group will be matched by higher net taxes, i.e., net transfers from workers to the government.)

Earnings and Fringe Benefits

The age profile of employee compensation is estimated using survey data which reports individual earnings. In general, surveys provide information about wages and salaries, but do not provide information about employers' social contributions. In the absence of information to the contrary, we assume that employers' social contribution is a constant proportion of wages and salaries.

Self-employment Income

With few exceptions self-employment income is reported for households rather than individuals. Even in cases where values are reported for individuals, such as in Taiwan, a high percentage is assigned to the household head. Often children or the spouse of the household head are reported as receiving no income and are classified as unpaid family workers. This may lead to under-reporting of the labor income of younger and, perhaps, older household members.

To correct for this problem self-employment income is allocated to family members who are reported as self-employed or as unpaid family workers. The self-employment income of the household is allocated to the members using the age profile of the mean earnings of employees.

${YLS(a,j) = \gamma(a) YLS(j)$
$\gamma(a)= w(a)N(a,j)/\sum_x w(x)N(x,j)$

where YLS(j) is the self-employment portion of labor income for household j, YLS(a,j) is the self-employment portion accruing to all individuals in household j who are age a, w(x) is the average earnings of employees of age x and N(x,j) is the number of persons in household j who are self-employed or unpaid family workers, and $\gamma(a)$ is the share of total household self-employment labor income allocated to each household self-employed or unpaid family member who is age a.

In this way the total self-employment labor income generated at age a in each household is found, and summing across all households the total self employment labor income generated at age a is found. Dividing this by the total number of surveyed individuals age a gives the age profile of per capita self employment income. Then using the national population age distribution this age profile is adjusted to match the national control total.

Stata Code

Discussion

Additional Topics

Smoothing

Smoothing methods tend to greatly over-estimate labor income at young ages. The most reliable method is to exclude children who have not yet reached working age. This may be determined empirically as the first age for which a positive value is estimated or on a priori grounds based on the survey instrument, e.g., all those under age 15 or under age 12. We then smoothed the labor income for those who had reached working age using Supsmu with a relatively small bandwidth, e.g., 0.05 or 0.10. To assess the results it is a good idea to calculate the smoothed relative to the unsmoothed value to judge the percentage error.

Social benefits for public workers

Cohort data

Age profiles can be converted to cohort data. An example using labor income profiles for Taiwan, Labor income by cohort. For further information on converting cross-sectional data to cohort, refer to the Methods page on Cohort Data.

Additional Reading: R. Lee, S.H. Lee, and A. Mason (2005; revised 2007). Working Paper No. 8. (LLM2005)

Comments about the labor income methodology:

Comments:

leesang: (Thu Sep 4 20:40:54 2008 )

I think NTA team members are already aware of some confusions of terminology here, but let me clarify it one more time. The labor's share of "the operating surplus of unincorporated enterprises" should be read as the labor's share of the "mixed income". The operating surplus of unincorporated enterprises are the rental value of owner occupied housing. In some countries, the mixed income includes the value of owner occupied housing, thus these country teams need more work to separate the rental value of owner occupied housing from the mixed income.

Author: Comfort Sumida
Revisions:  A Mason
Last Revised: September 4, 2007