2.2.3 Labor Income

Introduction

Labor income includes 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.

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.

Compensation also includes compensation to those on paid leave (vacation and sick leave) and hence excluded from labor income calculations. 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.

Labor income includes 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. In the absence of information to the contrary, we assume that two-thirds of the operating surplus of unincorporated enterprises is labor income. The simple method of allocating two-thirds of mixed income to labor is consistent with the best available evidence on this issue.

Earnings/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 of each household member, 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.

Labor Income of the Self-Employed

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, often, 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. That is the self-employment income accruing to ith individual in household j (YLSij(x)) is,

${YLS}_i_j(x)= {YLS}_j\gamma(x)$

${\gamma}(x) = w(x){SE}_j(x) / \sum_x w(x){SE}_j(a)$

where x is the age of the ith household member, SEj(x) is the number of people in household j who are self-employed or unpaid family workers of age x, w(x) is the average earnings of employees. Thus, the share of total household self-employment labor income allocated to each household self-employed or unpaid family member of age x is determined.

In this way the total self-employment labor income generated at age x in each household is found, and summing across all households the total self employment labor income generated at age x is found. Stata programming code for Taiwan is available in the Appendix section.