A closer look at proprietor income outpacing wages

Incomes have grown more quickly for businesses than for their employees since the recession ended. Those who have businesses related to the oil industry saw the biggest jumps in income, helping drive up the overall average growth in proprietors’ income.
Incomes have grown more quickly for businesses than for their employees since the recession ended. Those who have businesses related to the oil industry saw the biggest jumps in income, helping drive up the overall average growth in proprietors’ income. File photo

It looks like a tale of two Wichitas:

Small business owners in the Wichita metro area have seen their incomes increase an average of 13.3 percent a year since hitting bottom in 2009. By 2012, the most recent year available from the U.S. Bureau of Economic Analysis, they were earning well over their pre-recession peak of 2008.

Many corporations are also doing well. Last year Kansas corporate taxes, based on companies’ financial performance, were 55 percent higher than in 2009.

On the other hand, the employees of those companies have seen their incomes rise 1.6 percent per year since the recession ended. By 2012 wages still hadn’t made it back to 2008 levels.

Statewide, the numbers are only slightly less extreme: 11.6 percent annual growth for non-farm proprietors and 2.6 percent per year for wages.

But it’s not that all businesses have been doing great, and their employees, not so great.

Differences between industries can be stark. Oil and gas industry incomes rose 40.7 percent per year, and the agriculture support industry incomes were up 12.6 percent, while income in the printing and related sectors fell 2.3 percent.

So what seems on the surface like fodder for those who see income inequality as a huge issue and believe businesses are making money at the expense of their workers is actually more complex.

Still, there’s little doubt that many workers have felt squeezed since 2009, with wages cut, frozen or rising only very slowly; and benefits eliminated or reduced.

“It’s been a slow increase,” said Oweda Martinez of Wichita, who works for a technology company. But she added, “I think with the economy the way it is, it’s justified. We’re still adding jobs.”

And it sure doesn’t sound like employer greed when you talk to many business owners. They’ve been complaining for five years about President Barack Obama, the economy, Obama, regulation, competitors, taxes, uncertainty and Obama. Many say they feel under siege.

“They feel squeezed by regulations, they feel squeezed by big business as their suppliers,” said Tim Witsman, president of the Wichita Independent Business Association. “It’s flat to modest growth in the last year.”

Unemployment and wages

Donna Ginther, director of the Center for Economic and Business Analysis at the University of Kansas, said it’s a matter of bargaining power. When there’s only weak growth, employers may not hire more workers and instead make existing workers do more. And when there’s high unemployment, employers don’t feel pressure to increase pay.

“It’s true employees have limited bargaining power,” she said. “As long as there is an excess supply of labor, there is limited pressure on wages. When the unemployment rate remains high, the ability to change jobs and the ability to ask for more money from your employer is constrained.”

She said that as the economy grows, employers will reach a point at which they have to spend more on labor.

Economists at the Kansas Department of Labor take a longer view: Proprietor incomes typically outpace wages early in an economic recovery.

Proprietors’ income is more volatile than wages, rocketing up and down with economic cycles. In Kansas those incomes shot up in 1983, 1991 and 2002, at the beginnings of recoveries.

Inayat Noormohmad, chief economist for the labor department, said that this cycle looks a bit like earlier ones.

The theory, he said, is that businesses run with a lot of slack in a recession – employees not that busy, unused space in the back of the store – and that when business starts to pick up, the owners don’t have to pay any more for those fixed costs. Most of the extra money goes right into the owners’ pockets.

“There is uncertainty in the recovery and companies hesitate to take on the full commitment of hiring,” he said. “They want to see that demand is sustainable.”

The flip side of that is that when the economy is going down, business incomes can drop through the floor, falling faster and further than wages. Wichita area proprietors’ wages fell 20 percent in 2009 compared to wages, which fell 5 percent.

But Jeremy Hill, director of the Center for Economic Development and Business Research at Wichita State University, also sees some longer-term changes in what’s happening in Wichita.

Some of the increase in proprietor incomes comes from growing numbers of highly skilled consultants and contractors, such as engineers and managers. They are increasingly leaving companies and heading out onto the open market where they can command higher pay, he said.

“That’s not cyclical at all,” he said. “It’s the outsourcing of expertise. Business is having to pay a lot for these skills.”

Who’s doing well

Hill said that the reality is that only a relatively few sectors are seeing that much income growth.

One is oil and oil service companies, he said, and statistics bear him out. Oil and gas exploration and services, which includes large numbers of small firms, is at the top of the heap in income growth, with earnings growth of 178 percent between 2009 and 2012.

But some of that may be a one-time injection of cash as larger out-of-state companies came into Kansas in 2010 and 2011, spreading around a lot of investor money as they explored horizontal drilling in the Mississippian formation.

Kenny Hoop, an independent contractor who negotiates oil and gas leases with landowners, said that the price of oil leases has fallen from $300 to $500 per acre to $15 to $30 per acre as the oil play has proved more difficult than expected and a lot of companies have left or scaled back.

“It’s kind of too bad,” he said. “We were hoping it was going to work out.”

Another sector doing well is agriculture-related services because of the strong farm economy.

Gary McClellen, sales manager for Longshot Enterprises of Salina, was in Wichita this week at the U.S. Custom Harvesters convention at a booth touting the company’s electric motors for rolling and unrolling grain truck tarps and closing and opening grain truck chutes.

There’s been a lot of money in agriculture in the last five years and a lot of new equipment has been purchased. These systems save on the arms and backs of grain truck drivers, he said.

“Sales have been very good,” he said. “I started with these guys in 2011 and we’ve nearly doubled sales.”

But for businesses that depend entirely on wage-earner spending, the story isn’t as rosy.

Monte Pelz owns Pelz Retail Liquor, 301 S. Tyler Road. Liquor, he said, is largely a discretionary purchase and people tend to buy more when they have more money.

Sales and income have been very slow in increasing. He singled out the expiration of the temporary reduction on Social Security withholding taxes. That 2 percentage point drop for wage earners, which was instituted as part of the federal government’s economic stimulus, ended in January 2013.

Today, he said, he characterized the business as OK, not great.

“I had a furnace go out last week and it was a $10,000 deal,” he said. “That’s not in the budget. That has to come out of my income.”