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African Americans' Pursuit of Self-Employment

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  • Lofstrom, Magnus

    () (Public Policy Institute of California)

  • Bates, Timothy

    () (Wayne State University, Detroit)

Abstract

This study examines causes of black/white gaps in business ownership and self-employment rates by analyzing small-business entry and exit patterns. We proceed by recognizing heterogeneity in business ownership across different industry groups: a classification of firms by human- and financial-capital “intensiveness”, or entry barriers, we find, is useful for explaining racial differences in entrepreneurship. The barriers facing aspiring entrepreneurs seeking entry into low-barrier industries differ substantially from those limiting entry into high-barrier industries. Higher entry and lower exit rates typifying whites, relative to African Americans, are traditionally interpreted as reflections of the greater financial- and human-capital resources possessed by non-minorities. This consensus view, however, is simplistic. While education background is a powerful predictor of self-employment patterns in the low-barrier industries, advanced educational credentials actually predict lower entry: college graduates are less likely to select into low-barrier small business ownership. In the high-barrier fields, in contrast, college-educated individuals are more likely than less educated persons to enter into self employment. Overall, black presence in high-barrier fields is held down by lower net asset holdings and weaker educational credentials of potential and actual entrepreneurs. In the low-barrier industries, where the majority of black-owned businesses operate, net worth levels and educational backgrounds are trumped by the racial characteristic: low black entry and high exit rates are powerfully predicted by one's race.

Suggested Citation

  • Lofstrom, Magnus & Bates, Timothy, 2007. "African Americans' Pursuit of Self-Employment," IZA Discussion Papers 3156, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp3156
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    References listed on IDEAS

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    1. Timothy Bates & Robert McGuckin, 1990. "The Characteristics of Business Owners Data Base," Journal of Human Resources, University of Wisconsin Press, vol. 25(4), pages 736-751.
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    Cited by:

    1. Aaron K. Chatterji & Kenneth Y. Chay & Robert W. Fairlie, 2014. "The Impact of City Contracting Set-Asides on Black Self-Employment and Employment," Journal of Labor Economics, University of Chicago Press, vol. 32(3), pages 507-561.
    2. Ashwini Deshpande & Smriti Sharma, 2016. "Disadvantage and discrimination in self-employment: caste gaps in earnings in Indian small businesses," Small Business Economics, Springer, vol. 46(2), pages 325-346, February.
    3. repec:spr:blkpoe:v:44:y:2017:i:1:d:10.1007_s12114-017-9249-x is not listed on IDEAS
    4. Robert W. Fairlie & Harry A. Krashinsky, 2012. "Liquidity Constraints, Household Wealth, And Entrepreneurship Revisited," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 58(2), pages 279-306, June.
    5. Amaechi N. Nwaokoro, 2017. "Survey of Free Market Principles for Encouraging Market: Participation of African American and the Economically Challenged," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 9(1), pages 130-144, January.
    6. Robert W. Fairlie, 2013. "Entrepreneurship, Economic Conditions, and the Great Recession," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 22(2), pages 207-231, June.
    7. Nadia Simoes & Nuno Crespo & Sandrina B. Moreira, 2016. "Individual Determinants Of Self-Employment Entry: What Do We Really Know?," Journal of Economic Surveys, Wiley Blackwell, vol. 30(4), pages 783-806, September.
    8. Loren Henderson & Cedric Herring & Hayward Horton & Melvin Thomas, 2015. "Credit Where Credit is Due?: Race, Gender, and Discrimination in the Credit Scores of Business Startups," The Review of Black Political Economy, Springer;National Economic Association, vol. 42(4), pages 459-479, December.
    9. Robert W. Fairlie, 2013. "Minority and immigrant entrepreneurs: access to financial capital," Chapters,in: International Handbook on the Economics of Migration, chapter 8, pages 153-175 Edward Elgar Publishing.
    10. Uwaifo Oyelere, Ruth & Belton, Willie, 2008. "The Role of Information and Institutions in Understanding the Black-White Gap in Self-Employment," IZA Discussion Papers 3761, Institute for the Study of Labor (IZA).
    11. M. Thomas, 2009. "The impact of education histories on the decision to become self-employed: a study of young, aspiring, minority business owners," Small Business Economics, Springer, vol. 33(4), pages 455-466, December.
    12. Marios Michaelides, 2017. "Nascent Entrepreneurship and Race: Evidence from the GATE Experiment," University of Cyprus Working Papers in Economics 02-2017, University of Cyprus Department of Economics.
    13. repec:kap:sbusec:v:50:y:2018:i:3:d:10.1007_s11187-017-9878-2 is not listed on IDEAS
    14. Michaelides, Marios, 2010. "Race and self-employment: The role of training programs, self-employment background, and access to financing," MPRA Paper 20884, University Library of Munich, Germany.
    15. Uwaifo Oyelere, Ruth & Belton, Willie, 2009. "Coming to America: Does Immigrant's Home Country Economic Status Impact the Probability of Self-Employment in the U.S.?," IZA Discussion Papers 4178, Institute for the Study of Labor (IZA).
    16. Joanna Georgios Alexopoulos & Anne Villamil, 2014. "The Effects Of Frictions In The Labormarket On Entrepreneurship And Economic Development," Anais do XL Encontro Nacional de Economia [Proceedings of the 40th Brazilian Economics Meeting] 045, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].

    More about this item

    Keywords

    African American; self-employment; entrepreneurship; entry barriers;

    JEL classification:

    • J15 - Labor and Demographic Economics - - Demographic Economics - - - Economics of Minorities, Races, Indigenous Peoples, and Immigrants; Non-labor Discrimination
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship

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