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April, 2001, Vol. 124, No. 4

Précis

Entrepreneurial women and minorities
Intangible values
Cognitive skills and wage inequality

Précis from past issues

Entrepreneurial women and minorities

The Bureau of the Census has released the results of its 1997 Economic Census Surveys of Minority- and Women-Owned Business Enterprises. Some of the highlights in the series of reports were:

• Women owned 5.4 million businesses in the United States in 1997. These firms employed 7.1 million people and generated $818.7 billion in receipts. Women-owned firms made up 26 percent of the Nation’s 20.8 million nonfarm businesses in 1997 and accounted for 4.4 percent of the $18.6 trillion in receipts for all businesses. In addition, there were 3.6 million firms jointly owned by a husband-wife team.
•  Hispanic entrepreneurs owned 2 million firms employing more than 1.3 million people and generating $186.3 billion in revenues in 1997. Hispanic-owned firms thus made up 6 percent of nonfarm businesses and 1 percent of receipts.
• There were 823,500 African American-owned businesses in the United States in 1997. They employed 718,300 people and generated $71.2 billion in revenues. Nine of every ten African American-owned firms were sole proprietorships—unincorporated businesses owned by individuals.

Self-employment among women was the topic of a March 1994 article in this Review, "Characteristics of self-employed women in the United States," by Theresa J. Devine, and the role of self-employment and entrepreneurship in job growth has been the topic of articles in April 1999 and July 2000.

The new Census Bureau reports are available on-line at: http://www.census.gov/csd/mwb/.

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Intangible values

Today’s accounting standards do not allow companies to record investments to foster innovation or to improve the productivity of employees as part of their balance sheet assets, writes Andrew Osterland in the April 2001 issue of CFO, a trade journal for senior financial executives. In large part this reflects the fact that many accounting experts consider valuing such intangible assets to involve too much uncertainty and subjective judgement.

Others, such as New York University professor Baruch Lev, point out to Osterland that "It’s the investments in R&D, Internet applications, human resources, and customer acquisition that drive the performance of companies now." To help bridge this gap, Osterland, with the help of Professor Lev and his colleague Marc Bothwell, proposes a method to at least roughly estimate the amount of what they call "knowledge capital" that might be added to a firm’s balance sheet.

The methodology starts with an estimate of knowledge earnings, a measure of the divergence of a company’s "normalized" (average historical and projected) earnings and the earnings that could be expected at normal rates of return for the physical and financial assets that are carried on the balance sheet. (Lev and Bothwell assume these are 7 percent and 4.5 percent, respectively.) The part of normalized earnings that exceeds such expected returns is classified as "knowledge earnings." "Knowledge capital," in turn, is derived as the present discounted value of the knowledge earnings stream. (There is no standard rate of expected return on knowledge assets, so Lev and Bothwell assume the 10.5-percent average return historically made by three knowledge rich industries: software, biotech, and drugs.)

After calculating knowledge earnings and capital for 22 industry sectors, they found that the sectors with the highest median ratios of knowledge capital to book value were pharmaceuticals, home products, computer hardware, and semiconductors. Those with the lowest ratios were media and forest products.

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Cognitive skills and wage inequality

Labor economists have tried to explain in recent years why the United States has higher levels of wage inequality compared with other countries such as Canada and various European countries. Possible explanations involve labor market institutions, market factors, and labor force characteristics.

In "Do Cognitive Test Scores Explain Higher U.S. Wage Inequality?" (National Bureau of Economic Research Working Paper 8210), Francine D. Blau and Lawrence M. Kahn of Cornell University attempt to identify the role of cognitive performance in explaining differences among countries in wage inequality. They use microdata from the 1994–96 International Adult Literacy Survey (IALS).

The IALS includes results from comparable tests given to men and women in a number of countries in the following areas: mathematics, prose literacy, and document-reading ability. (Prose literacy is distinguished from document-reading literacy in that the former refers to knowledge and skills required to comprehend and use information in texts such as news stories and fiction, whereas the latter refers to knowledge and skills required to locate and use information that is in various formats such as job applications and transportation schedules.)

Blau and Kahn’s analysis indicates that, although cognitive skills play a role in explaining the greater wage inequality in the United States compared to other countries, "higher labor market prices (i.e. higher returns to measured human capital and cognitive performance) still play important roles for both men and women." Their analysis also shows that "on average, prices are quantitatively considerably more important than differences in the distribution of test scores in explaining the relatively high levels of wage inequality in the U.S."

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