Does disparity in self-employment rates imply discrimination? An empirical investigation.

Author:Lunn, John
  1. Introduction

    Self-employment rates in the United States differ widely across racial, ethnic, and gender categories. In general, the self-employment rate of men exceeds that of women, and self-employment rates of whites exceed the self-employment rates of other racial and ethnic groups. Some see these disparities as evidence of discrimination. For example, Blanchflower (2009) documents substantial disparities between whites and minorities, and also argues that there is evidence that some disparities can be attributed to discrimination in small business credit markets. Wainwright (2000) documents substantial disparities in self-employment using 1990 census data and argues that the disparities can be attributed to discrimination. Evidence on disparities also has been used in the analysis of construction markets in evaluating whether a race-preference program is constitutional (Blanchflower and Wainwright 2005). We offer evidence that casts serious doubt on whether one can infer discrimination from disparities in self-employment rates.

  2. Previous Research

    Balkin (1989) describes several theories concerning self-employment that economists and sociologists use. (1) Economists primarily use a human capital approach. The individual compares potential monetary and nonmonetary rewards associated with self-employment to those of wage or salary employment and selects the one that maximizes the expected present value of expected utility. Sociological theories focus more on social networks, which link potential entrepreneurs to suppliers, customers, and sources of financial capital. One explanation for the greater extent of self-employment among some groups of Asians relative to some other ethnic or racial groups is that they tend to be part of social networks that provide educational and financial support.

    The human capital approach, which focuses on the comparison a person makes between self-employment and working for someone else, introduces an ambiguity into our expectations about the effects of some personal characteristics that might be used in empirical analysis. Self-employment is more attractive than wage or salary employment for two quite different kinds of individuals--one who is "better" than the average worker and one who is "worse" than the average worker. Some workers are "pulled" into self-employment because they are capable in both the technical dimensions of the product or service and in managing people and money. Other workers, however, are "pushed" into self-employment because they cannot hold onto a job, perhaps because they express antipathy to authority. Another possible reason is that they face discrimination in employment markets.

    Evans and Leighton (1990) find that the self-employed are more likely to have experienced unemployment than wage employees. This finding is consistent with the push argument. On the other hand, Robinson and Sexton (1994) report that the self-employed are more educated than wage and salary employees. Lunn and Steen (2000) found differences in the effects of education on the likelihood of self employment across industries in the United States. That is, selfemployment in some industries seemed more consistent with the pull factors but more consistent with the push factors in other industries. Fraser and Greene (2006) find that entrepreneurs tend to be more optimistic than employees, and that both the optimism and the uncertainty they face diminish with time.

    For US data, self-employment rates of immigrants tend to be higher than self-employment rates for native-born Americans. Consequently, some researchers have focused on the situations that immigrants confront, especially recent immigrants from Asia and Latin America. Changes in immigration laws in 1965 generated large flows of immigrants from Asia and from Central and South America. The success of some of these groups, particularly the Chinese and the Koreans, has generated a substantial literature concerning the factors that have contributed to their relatively greater success.

    Immigrants may have trouble getting a job due to language problems, discrimination, and unfamiliarity with the host country's institutions. Some may opt for self-employment, especially if they can sell their good or service to coethnics. The social networks of some ethnic groups are extensive, which helps potential entrepreneurs obtain financing and business advice useful for establishing a business. Waldringer, Aldrich, and Ward (1990) develop their research agenda by focusing on the interrelationships among the opportunity structure facing immigrants, group characteristics, and ethnic strategies. Sanders and Nee (1996) examined self-employment among immigrants and found that "self-employment is facilitated by social capital present in the family and by personal human capital/class resources of immigrants" (p. 244).

    Lunn and Steen (2005) document the heterogeneity of selfemployment among Asian groups. Using 1990 Census data, they report a range of self-employment rates from 3.06 percent (Laotians) to 24.14 percent (Koreans). Kim, Hurh, and Fernandez (1989) examined differences in self-employment rates among Koreans, Chinese, and Asian Indians in the United States. They suggest that an immigrant who obtained a college education in their native land would be more likely to select self-employment in the United States than either immigrants without a college degree or those who obtained some post-graduate education in the United States, and they found...

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