Self-employed income in the OECD countries: some consequencies for functional income distribution

Functional income distribution can be an important driver of inequality. When the market remuneration of labour and capital is very uneven across individuals, as they have been in recent decades, the personal distribution of income tends to polarise, jeopardising social cohesion. This explains a renewed interest in functional distribution. Nevertheless, the role of self-employed income has been often misunderstood in estimating factor income shares. National accounts provide estimates of the compensation of employees and the operating surplus, but do not refer to self-employed workers as a specific productive factor, implicitly including their income in the ‘mixed income’ aggregate and in some other minor items. Most analysts estimate the income of self-employed workers by attributing to them the average unit compensation of the employees, although in fact this is not necessarily consistent with the GDP estimates. Other estimates take a fixed share of the ‘mixed income’, usually the same for every country. When national accounts are very detailed, as in the case of Italy, under some assumptions it is possible to accurately estimate self-employment income from sectors’ non-financial accounts. In this paper we analyse four estimation approaches for self-employed incomes, since only the total amount of ‘mixed income’ received by households is available for most countries. We analyse the data of the OECD countries focusing mainly on eight large economies: the US, Japan, the UK, Germany, France, the Netherlands, Spain and Italy. The results are somehow unexpected. First of all, evaluating the income of the self-employed properly, the overall labour share is declining much faster than reported by the official data in some countries, and more countries showed a decrease in the 2000s. Indeed, the real unit compensation of the self-employed declined significantly in most of the eight countries (and in some of the others) after the mid or the end of the nineties, since self-employment has been used extensively to reduce the overall labour cost. Unit labour cost (ULC) also increased much slower (or even declined more) after 2000 in most countries, shedding new light on the pattern of international competitiveness and the drivers of inflation. The share of operative surplus of non-financial and financial corporations, properly recalculated, has exhibited different dynamics, whereas the component related to imputed rentals of owner occupied houses played an unexpectedly important role. Finally, the mark-up on variable production costs has been higher than expected and its evolution has been faster in most countries than what reported before, showing a lower sensitivity to the business cycle.