Self employment rates

Measuring Microenterprise ProfitsChristopher Woodruff, UC San Diego(Based on joint work with Suresh de Mel and David McKenzie) Presentation for conference on Innovations in Development Theory and Survey Data: Implications for Policy UTCC, Bangkok, August 4-6, 2008

Self employment rates Source: Gollin 2002

Measuring microenterprises • Important… • Around a quarter of the urban labor force in a typical low-income country • Owners represent an important part of the urban poor • But challenging • Lack of administrative data • Only about 20% of microenterprises keep any records

Data • Data from two surveys in Sri Lanka • 618 non-ag enterprises in southern Sri Lanka surveyed multiple times, retail, manufacturing, services • Data from 174 retail shops in Kandy • 1/3 surveyed monthly • 1/3 surveyed weekly • 1/3rd surveyed every other day

Outline • Cash flow vs. profits • Recall issues • Deliberate mis-reporting • General • Specific to interventions • Prospects for obtaining harder data?

What is the best measure of performance? • Profits vs. cash flow • Possible that perhaps owners don’t understand well the concept of profits • Very low correlations between profits and R-C: around 0.2, in our data and in other data • Levels differ markedly as well, with R-C much lower

Profits and R-C • Profits: “What was the total income the business earning during the month of March after paying all expenses including the wages of employees, but not including any income you paid yourself. That is, what were the profits of your business during March?” • Revenue / Cost • Costs in eleven categories

Profits v. (R-C)

Why is the cash flow/profit correlation so low?

Timing mismatches • Inputs purchased one month may be sold in a later month • Seasonality • We asked firms for markup between input and sales prices (up to three products) “Consider the most important item which you manufacture. If you buy Rs. 1000 worth of raw materials how much of revenue will you receive from the final products that you manufacture with these raw materials on average?”

Why is the cash flow/profit correlation so low?

Why is the cash flow/profit correlation so low? • This is the same timing mismatch that Samphantharak and Townsend (2008) resolve using monthly data on inventories • Clearly, better to have monthly data • We had no success getting monthly data in quarterly surveys (beginning of last month, end of last month, expected end of this month) • Markup allows this correction to be made even in cross-sectional data • We interpret the high correlations as suggesting that owners do understand what ‘profits’ are

Profits v R-C • Improvements in the correlations of the measures are reassuring • We interpret the data as suggesting that profits are likely a better reflection of reality than R-C, based on a comparison of levels • In baseline month, unskilled workers earn 6-7000 LKR/month • Owners say they would need 8000 LKR in wages to shut down

Recall issues • Compare March 2005 sales reported in April with March 2005 sales reported in July. Later report is 10% lower on average, 16% at median • But, compare annual sales reported in April 2006 with sum of monthly sales reported quarterly. Annual recall only 3% lower

Recall issues: 1 month vs. 4

Recall issues: Annual

Recall issues: the effect of books • Provided simple ledgers for half of the enterprises (daily/weekly recording) • Expenses on inputs • Other expenses • Goods taken from business • Total business revenue • Business income used by household

Recall issues: the effect of books • Find: • Increased reported revenue and expenses • Much higher level of goods taken for home use • Little effect on reported profits

Compliance with books • Compliance fairly high for first few months • 68% in first month, 53% in third, 60% in fourth, 43% in ninth month • In April 2008, only 17% still keeping books, only 8% as detailed as the ledgers • In Kandy, with weekly interviews, higher compliance • One month later, 52% still keeping books; a year later, only 20% keeping books in anything like this format

Deliberate misreporting • We might suspect firms would underreport profits • 2/3rds say ‘firms like theirs’ under report profits • Fear of taxes • Trying to show difficulty of running business • Don’t want to reveal true state of business

Deliberate misreporting Only weak evidence of reversion to the mean, typically found in wage data

Do the ‘firms like yours’ reflect own firms? • For 1/3rd of the sample in Kandy, RAs visited every 2 days, recorded all transactions for an ~hour each visit. • Compare reported revenue with revenue estimated from these visits, and with the average % under reporting

Do the ‘firms like yours’ reflect own firms? Compare with “firms like yours” response: average under reporting of 32.5%

Impact of interventions • Deliberate mis-reporting is particularly problematic for analyzing impact of interventions • Two models of behavior: • Warm glow (wears off over time) • Switch to “honest reporting” state (might not wear off) • Ideally, would have ‘harder’ data

Prospects for harder data? • In some contexts administrative data is an option • Wage workers • MFI interventions (repayment) • But generally any administrative data on incomes and revenues of microenterprises will be less rather than more reliable

Harder measures • One possibility is independent valuations of inventories

Measuring microenterprises • A poor man’s version of Samphantharak and Townsend • Low correlations between profit reflect timing mismatches more than a misunderstanding of profits • We find little evidence of long-term recall bias, no effect of books on reported profits • Monitoring of sales levels suggests firms under report sales by 30%, about what they say “firms like their” do.

Measuring microenterprises • Measurement issues more problematic when combined with interventions • Did not address a couple of relevant issues: • Allocation of assets used jointly by business and household • Depreciation of fixed assets

Self employment rates