[quote=patientrenter]
Source for variations in income: BEA, National Acccounts, Personal Income, (a) Received Compensation of Employees, and (b) Proprietors’ income with inventory valuation and capital consumption adjustments. Sample standard deviation of % changes in the annual series from 1929-2008 is 7.4% for the wage measure, and 11.9% for the owner measure.[/quote]
This is an interesting data point although I’m not sure if this difference is meaningful from the perspective of a debt holder. It might be – but it might not be. For example, I would be surprised if the difference in the standard deviation of earnings for all AA-rated companies averaged less than 450 bps. (Let’s put aside what the value of a AA rating is for the moment.) And yet they all face similar borrowing costs. My point being that when you’re a debt holder – as opposed to an equity holder – you will assign the same rating (or rate) to companies (people) with varying earnings volatility (within a range) because you’re senior to most of the capital structure. But I agree that if these numbers are correct (and I have no reason to believe they aren’t) then there should be some higher rate assigned to self-employed folks all else being equal. But should it be 10 bps or 100 bps? Probably closer to the former than the latter using my AA analogy. Some premium? Yes. A big one? Perhaps, but there’s not enough information to know.
