This note discusses an issue with reported business profits. We first give an overview of the issue. We then give an accounting of how profits are assigned and propose a methodology for handling the issue. We conclude with how the problem will be addressed in the 2022 SIPP.

Overview of Profits Issue

The SEHSD Labor Force Statistics Branch discovered an error with the collection and processing of business profits (TJB(n)_PRFTB). Since Wave 1 of the 2014 SIPP, the profit question has asked:

For [ABC Incorporated], what was the dollar amount of [your] share of the
[net profit] for the year [of 2018]?

(The survey instrument dynamically fills a job’s name, the reference year, and other relevant information. So, for clarity we have substituted in example phrasing.)

The question is intended to collect net business profits for the entire year, but it is possible for the question to be asked twice for a given job because the SIPP allows respondents to report up to two spells of employment for each job. As a result, in each spell, respondents are asked to report their net business profits for the reference year.

Two problems arise from asking the question twice:

1) Respondents can contradict themselves and provide different answers each time the question is asked.

In some cases, respondents may be reporting spell-level profits. For example, suppose a respondent worked at ABC Incorporated from January to June (spell 1) and then from August to December (spell 2). When asked about net business profits, they report $80,000 of profits on the first spell and $70,000 of profits on the second. This reporting pattern could be interpreted as respondents reporting spell-level profits: reporting the net profits for January to June and then for August to December, such that net business profits for the reference year would sum to $150,000.
Another possibility is that a respondent doesn’t recall the value they reported in the first spell and reports a different value in the second spell. For example, suppose the respondent earned $80,000 during the reference year. When interviewed, the respondent correctly reports earning $80,000 of profits in the first spell. But then, when asked a second time in spell 2, they forget their first response and incorrectly report earning $70,000 of profits during the reference year. (Note, that as a data user, we would not have information on which of the two responses is “correct”.)

2) Internal processing treats business profits as a spell-level question even though it was intended to collect annual data, affecting variables both directly and indirectly.

TPEARN and TPEARN_ALT are directly affected because the first spell amount is equally divided across the weeks worked in the first spell and the second spell amount is equally divided across the weeks worked in the second spell. For example, suppose the respondent earned $80,000 of profits during the reference year across 44 weeks (24 weeks in spell 1 and 20 weeks in spell 2). Weekly earnings would be $1818.18. If the respondent reports $80,000 of profits in the first spell, weekly earnings in spell 1 would be $3333.33; and if they report $70,000 of profits in the second spell, weekly earnings in spell 2 would be $3500.
Indirectly, this problem affects earnings variables imputed using SIPP’s Sequential Regression Multivariate Imputation (SRMI) for individuals who had two spells on a self-employed job. Because profits are an input in SIPP’s SRMI imputation model, the factor used to scale hot-deck imputed earnings takes both reported and imputed profits into account. We discuss how this assumption affects imputed profits more in the next section. For a more detailed discussion of SRMI Imputed Earnings see the User Note “2019 SIPP: User Note for Changes to Imputed Earnings”.

How Profits are Assigned for Self-Employed Jobs with Two Spells

The problems associated with the conceptual discrepancy between how the business profits question text is phrased and how it is processed leads to different outcomes. This section accounts for each possibility.

Both spells have reported profits: If both spells have reported profits, then the SIPP processing will assign the values reported on each spell to that spell. When a respondent reports the same values, then the same value will be assigned to each spell. Like the example above (2a), when a respondent reports different values, the different values will be assigned to each spell.
One spell has reported profits and one spell has imputed profits: If a respondent provides an answer once but not a second time, then the SIPP editing process will assign the reported value for the spell with reported profits and impute a value for the other spell. The imputed value may not match the reported value, so the job could have two spells with different profit amounts and different profit allocation flags (AJB(n)_PRFTB) assigned.
Both spells have imputed profits: Each spell will have a value imputed by either the hot-deck imputation model or SIPP’s Sequential Regression Multivariate Imputation (SRMI) model.
- If the value is imputed by hot-deck, then a donor value will be assigned from a report of business profits. Because the vast majority of self-employed jobs only have one spell, the assigned value will most likely be from a job with only one spell, meaning the hot-deck assigned value will likely be a report for the entire year. We cannot, however, generally assess how often a hot-deck donor had two spells of employment on a self-employed job.
- If the value is imputed by SRMI, then the hot-deck assigned values will be scaled such that the total sum of imputed income across all income variables equals the income imputed by the SRMI model. (For a detailed discussion of the SRMI Imputation Algorithm see the User Note titled, “2019 SIPP: User Note for Changes to Imputed Earnings”.) Due to the nature of the scaling process, the SRMI assigned values will better correspond to spell-level estimates. In the simplest case where a self-employed job’s only income source is profits, the job spells are of equal length, and the respondent had no away without pay spells, the imputed profits will be the SRMI imputed annual estimate divided equally across both spells.

Proposed Methodology for Handling Self-Employed Jobs with Two Spells

The following is a proposed methodology to annualize profits for self-employed jobs with two spells. The goal is to provide a methodology that follows as closely as possible the methodology that will be applied in the 2022 SIPP by treating profits as a year-level variable.

The challenge in implementing the proposed methodology is that prior to the 2020 SIPP, users were not provided the EJB(n)_PFTBCHK variable. EJB(n)_PFTBCHK indicates whether a self-employed job’s earnings were included in the reported profits. EJB(n)_PFTBCHK is necessary to calculate the profit value reported at the time of interview, EJB(n)_PRFTB. The profits provided on the public-use file, TJB(n)_PRFTB, subtract off earnings if EJB(n)_PFTBCHK equals 2 to provide net profits. For the 2020 and 2021 SIPP, users will then be able to use EJB(n)_PFTBCHK to calculate EJB(n)_PRFTB and closely follow the methodology applied in the 2022 SIPP. For the SIPP 2014 Panel to SIPP 2019, users will not have access to EJB(n)_PFTBCHK and for some respondents will need to infer or assume a value for EJB(n)_PFTBCHK to calculate EJB(n)_PRFTB.

SIPP 2020 and 2021 Methodology

First, users will need to define the variables below from the data.

first spell earnings = sum of TJB(n)_MSUM across all months in the first job spell
second spell earnings = sum of TJB(n)_MSUM across all months in the second job spell
total earnings = first spell earnings + second spell earnings

Second, users will want to construct EJB(n)_PRFTB, which is the profit value reported at the interview. There are two scenarios to account for:

TJB(n)_PRFTB equals EJB(n)_PRFTB: If EJB(n)_PFTBCHK is not equal to 2 on a self-employed job spell, then there is no need to subtract off earnings to calculate a business’ net profits. Users will then want to define EJB(n)_PRFTB as TJB(n)_PRFTB.
TJB(n)_PRFTB is not equal to EJB(n)_PRFTB: If EJB(n)_PFTBCHK is equal to 2 on a self-employed job spell, then earnings must be subtracted from EJB(n)_PRFTB to calculate a business’ net profits (TJB(n)_PRFTB). Users will then want to define EJB(n)_PRFTB as TJB(n)_PRFTB plus spell earnings. Or as follows:
1. If EJB(n)_PFTBCHK equals 2 on the first spell, then set EJB(n)_PRFTB on the first spell equal to the first spell TJB(n)_PRFTB + first spell earnings
2. If EJB(n)_PFTBCHK equals 2 on the second spell, then set EJB(n)_PRFTB on the second spell equal to the second spell TJB(n)_PRFTB + second spell earnings

Third, with the spell-level variable EJB(n)_PRFTB defined, users will determine which report to use so that profits are treated as a year-level variable. Our proposed methodology prioritizes using reported data over imputed data, hot-deck imputed data over SRMI imputed data, and any imputation method over cold-deck imputation. Below are the transformations for each two-spell scenario.

Two reported spells (AJB(n)_PRFTB = 1 for both spells) For both spells:
- Set EJB(n)_PRFTB on both spells equal to EJB(n)_PRFTB on the first spell.
- Set EJB(n)_PRFTBCHK on both spells equal to EJB(n)_PFTBCHK on the first spell.
One Reported Spell and One Imputed Spell (AJB(n)_PRFTB = 1 for one spell and AJB(n)_PRFTB > 1 for the other spell) For both spells:
- Set EJB(n)_PRFTB on both spells equal to EJB(n)_PRFTB on the reported spell.
- Set EJB(n)_PRFTBCHK on both spells equal to EJB(n)_PFTBCHK on the reported spell.
Two hot-deck imputed spells (AJB(n)_PRFTB = 2 for both spells): For both spells:
- Set EJB(n)_PRFTB on both spells equal to EJB(n)_PRFTB on the first spell.
- Set EJB(n)_PRFTBCHK on both spells equal to EJB(n)_PFTBCHK on the first spell.
Two SRMI imputed spells (AJB(n)_PRFTB =4 or 6 for both spells): For both spells:
- Set EJB(n)_PRFTB on both spells equal to EJB(n)_PRFTB on the first spell.
- Set EJB(n)_PRFTBCHK on both spells equal to EJB(n)_PFTBCHK on the first spell.
One hot-deck imputed spell and one SRMI imputed spell (AJB(n)_PRFTB = 2 for one spell and AJB(n)_PRFTB = 4 or 6 for the other) For both spells:
- Set EJB(n)_PRFTB on both spells equal to EJB(n)_PRFTB on the hot-deck imputed spell.
- Set EJB(n)_PRFTBCHK on both spells equal to EJB(n)_PFTBCHK on the hot-deck imputed spell.
One spell is cold-deck imputed and the other is either hot-deck or SRMI imputed (AJB(n)_PRFTB = 5 for one spell and AJB(n)_PRFTB = 2, 4, or 6 for the other spell). For both spells:
- Set EJB(n)_PRFTB on both spells equal to EJB(n)_PRFTB on the spell that is not cold-deck imputed.
- Set EJB(n)_PRFTBCHK on both spells equal to EJB(n)_PFTBCHK on the spell that is not cold-deck imputed.
Two cold-deck imputed spells (AJB(n)_PRFTB = 5 for one spell and AJB(n)_PRFTB = 2, 4, or 6 for the other spell). For both spells:
- Set EJB(n)_PRFTB on both spells equal to EJB(n)_PRFTB on the first spell.
- Set EJB(n)_PRFTBCHK on both spells equal to EJB(n)_PFTBCHK on the first spell.

Fourth, recalculate TJB(n)_PRFTB for self-employed jobs with two spells.

If EJB(n)_PFTBCHK is not equal to 2, then TJB(n)_PRFTB equals EJB(n)_PRFTB.
If EJB(n)_PFTBCHK is equal to 2, then TJB(n)_PRFTB equals EJB(n)_PRFTB minus total earnings calculated in the first step.

2014 SIPP Wave 1 to 2019 SIPP Methodology

For survey years prior to 2020, we recommend that users follow an identical approach. But, because EJB(n)_PFTBCHK is not present on the files, users will either need to assume or infer a value. In deciding their approach users should note the universe of EJB(n)_PFTBCHK: all incorporated self-employed jobs (EJB(n)_JBORSE = 2 and EJB(n)_INCPB = 1) and unincorporated self-employed jobs with earnings (EJB(n)_JBORSE = 2 and EJB(n)_INCPB = 2 and EJB(n)_BSLRYB = 1). Therefore, TJB(n)_PRFTB equals EJB(n)_PRFTB for all unincorporated self-employed jobs without earnings (EJB(n)_JBORSE = 2 and EJB(n)_INCPB = 2 and EJB(n)_BSLRYB = 2).

Our recommendation for an assumed value is EJB(n)_PFTBCHK = 1. In the 2020 SIPP, there were a total of 55 jobs with two spells and only 2 of those jobs had EJB(n)_PFTBCHK = 2.

Users may also be able to infer the value of EJB(n)_PFTBCHK by comparing the values of TJB(n)_PRFTB by examining the reported earnings or profits. For example, if TJB(n)_PRFTB is equal on both spells and first spell earnings does not equal second spell earnings, then it is likely that EJB(n)_PFTBCHK equals one.

How this Problem is Addressed in the 2022 Instrument

The issue described above will be present from the first wave of the 2014 Panel through the 2021 SIPP. Starting with 2022 SIPP the profits question will only be asked once for each job, and the processing of business profits will change to treat the profits variable as a year level variable.

Page Last Revised - March 24, 2022

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