African Americans' Pursuit of Self-Employment

40 Pages Posted: 28 Nov 2007

See all articles by Magnus Lofstrom

Magnus Lofstrom

Public Policy Institute of California; Institute for the Study of Labor (IZA)

Timothy Bates

Wayne State University - College of Urban, Labor, & Metropolitan Affairs; University of Vermont - College of Arts and Sciences

Date Written: November 2007

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.

Keywords: self-employment, entrepreneurship, entry barriers, African American

JEL Classification: J15, L26

Suggested Citation

Lofstrom, Magnus and Bates, Timothy, African Americans' Pursuit of Self-Employment (November 2007). IZA Discussion Paper No. 3156. Available at SSRN: https://ssrn.com/abstract=1033379

Magnus Lofstrom (Contact Author)

Public Policy Institute of California ( email )

500 Washington Street
Suite 800
San Francisco, CA 94111
United States

Institute for the Study of Labor (IZA) ( email )

P.O. Box 7240
Bonn, D-53072
Germany
+49 228 3894 303 (Phone)
+49 228 3894 210 (Fax)

Timothy Bates

Wayne State University - College of Urban, Labor, & Metropolitan Affairs ( email )

Detroit, MI 48202
United States

University of Vermont - College of Arts and Sciences ( email )

United States

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