Wealth and Income: How Did Small Businesses Fare from 1989 to 1998?

by George W. Haynes, Ph.D.

2001. [38] pages. Montana State University,

Bozeman, MT 59715

under contract no. SBAHQ-00-M-0502

This Small Business Research Summary (ISSN 1076-8904) summarizes one of a series of research papers prepared under contracts

issued by the U.S. Small Business Administration’s Office of Advocacy. The opinions and recommendations of the authors of this study do

not necessarily reflect official policies of the SBA or other agencies of the U.S. government. For more information, write to the Office of

Advocacy at 409 Third Street S.W., Washington, DC 20416, or visit the office’s Internet site at www.sba.gov/advo.

Purpose

The rapid expansion in the U.S. economy in the

1990s raises an important equity question: who

earned the income and accumulated the wealth? Of

special interest, how did families owning small businesses fare in relation to other families?

This study examines three issues using the Federal

Reserve Board’s Survey of Consumer Finances (SCF)

data:

(1) Did families with small-business owners living in the household increase their incomes by more

than families without small-business owners?

(2) Did small-business-owning families increase

their wealth by more than other families?

(3) Among business owners, who were the winners and losers?

Scope and Methodology

SCF data from 1989, 1992, 1995, and 1998 are the

main sources used in this study. The variables of

interest include each household’s business ownership

status, income, and wealth (including assets and debt

held by members of the household). Business owners

are separated into four categories: self-employed

business owner/managers with one or no employees;

small business managers who are owner/managers

with more than one employee; angel investors who are

business owners with no active management responsibilities in any business; and other angel investors

who are primarily owners with other investments

where they provide some management support.

This study is primarily descriptive, using family

income and wealth to compare business- and nonbusiness-owning families. This descriptive analysis

requires careful comparison of means using chi-square

and t-tests to assess differences among business- and

non-business-owning families across time (1989

through 1998). These simple comparisons are supported by more complex empirical models, which are

designed to assess the determinants of high income

(greater than $50,000 total family income) and high

wealth (greater than $1 million total family wealth).

Logistic regression models are used to assess the

types of families and business owners more likely to

be classified as high income or high wealth. This

study uses non-linear logistic regression models to

predict the likelihood of high family income or

wealth from binomial classifications of high income

(yes/no) and high wealth (yes/no).

Highlights

The most important results and insights include:

(1) Families owning small businesses were significantly more likely to be classified as high income

(57 percent chance) and high wealth (15 percent

chance) than other families (30 and 3 percent chance,

respectively) in 1998.

(2) Stock holdings proved to be an important

determinant of high income and wealth. Among

small-business-owning families, families with stock

holdings had a 72 percent chance of being classified

as high income and a 26 percent chance of being

classified as high wealth in 1998, vs. 45 and 7 percent,
respectively, for small-business-owning families

without stock holdings.

(3) Mean income in 1998 dollars (real mean

income) significantly increased between 1992 and

1998 for only one group of small-business owners,

those with 25 employees or more.

(4) Real mean wealth trended upward for most

groups of small-business owners; however, no statistically significant increase in real mean wealth was

found for any group.

(5) Families owning small businesses realized a

17.4 percent increase in aggregate real income from

1992 to 1998; however, their share of aggregate

income declined from 23 to 21.7 percent. This

decline of 1.3 percent was captured by families not

owning any business; their aggregate real income

rose by 25.7 percent.

(6) Families owning small businesses realized a

37 percent increase in aggregate real wealth from

1992 to 1998; however, their share of aggregate

wealth declined from 35.3 to 33.8 percent. Again,

this decline of 1.5 percent was captured by families

not owning any business; their aggregate real worth

went up by 49.4 percent.

(7) Aggregate income and wealth change either

because the number of families in a group have

increased in number and/or because the families in

the group have realized changes in income and

wealth. While this economic expansion would appear

to have been an excellent time for families to invest

in small businesses, the number of families engaged

in at least one actively managed small business

appears to have remained remarkably stable at

around 12 million families. (This estimate of the

number of families should be used with caution

because it could represent a sampling problem in the

SCF. During an economic expansion, families that

previously would not have been included in the sampling frame because they were relatively poor and

could not be easily contacted by telephone were

included in the more recent sampling frames. These

families were less likely to be small-business owners; hence the population of families owning small

businesses may be underestimated.)

(8) Among small-business-owning families, the

most successful were those owning more than one

business. They realized increases in mean income

and wealth surpassing all other families.

(9) The economic expansion was relatively good

news for business-owning families headed by

women. These families realized higher rates than

other business owners in growth of real mean net

income (45 percent versus 28 percent) and wealth

(108 percent versus 43 percent). In addition, these

families did substantially better financially than nonbusiness-owning families headed by women.

(10) Among families owning small businesses, the

least successful were families owning smaller,

younger, and less well-established small businesses.

Relatively low unemployment rates, a strong stock

market, and excellent employment opportunities working for others increased the financial challenges faced

by small firms.

Conclusions

In general, families owning small businesses realized

increasing net income and wealth over the 1990s.

However, gains in aggregate income and wealth for

families owning small businesses were surpassed by

the gains experienced by non-business-owning families. The small business winners in this economic

expansion were those with large asset holdings such

as existing physical, financial, and human capital to

take advantage of the favorable economic conditions

and asset value appreciation. The lack of success of

the younger, less well-established businesses in relation to older, better-established businesses (and nonbusiness-owning families) in this very prosperous

economic time suggests there may be an even more

important role for agencies designed to assist fledgling small business start-ups.

Ordering Information

The full text of this report is online at www.sba.gov

/advo/research/rs205tot.pdf. Summaries of other

studies performed under contract to the U.S. Small

Business Administration’s Office of Advocacy are

available on the Internet at www.sba.gov/advo/research.

Printed copies are available for purchase from:

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