Skilled and Unskilled Immigrants and Entrepreneurship in a Developed Country

• Author: Hamid Beladi,Saibal Kar
• DOI: http://doi.org/10.1111/rode.12155
• Published date: 01 August 2015
• Date: 01 August 2015

Skilled and Unskilled Immigrants and

Entrepreneurship in a Developed Country

Hamid Beladi and Saibal Kar*

Abstract

Evidence from some OECD countries suggests that skilled immigrants are over-represented in entrepre-

neurship. We offer an analytical explanation to show that it may be a direct outcome of asymmetric infor-

mation between immigrants and potential employers in the rich countries. Limiting occupational choices to

self-employment and employment, we show that skilled immigrants vis-à-vis natives may be proportionally

over-represented in small businesses. This compensates for the income loss in the labor market. It results

from higher critical risk aversion among skilled immigrants compared with natives and subsequently leads

to higher average income for all immigrants in the cross-section. Finally, we show why a lesser number of

unskilled immigrants enter self-employment and discuss the speed of income convergence between all

immigrants and natives.

1. Introduction

Available evidence suggests that a considerably large proportion of immigrants in

many rich countries becomes self-employed and participates in small business activ-

ities. For North American and West European countries, empirical estimates show

that across many immigrant groups, the self-employment rate exceeds that of native-

born (Andersson and Hammarstedt, 2010; Constant and Zimmermann, 2006; Hum

and Simpson, 2004; Clark and Drinkwater, 2000; Robson, 1998; Bates, 1997; Fairlie

and Meyer, 1996; Yuengert, 1995; Kidd, 1993; Razin, 1992).1All these studies empha-

size that immigrants are proportionally over-represented in self-employment com-

pared with natives in the host country. Borjas (1986) utilizes the 1970 and 1980 US

Census data and finds that self-employment rates are higher for immigrants than for

native-born men for six racial categories. Moreover, more recent immigrant cohorts

and persons immigrating less recently within a given cohort are more likely to be self-

employed (enclave effect). Further, a case study of Spain (Carrasco, 1999) shows that

lack of opportunities in the labor market leads to unemployed individuals being more

likely to switch into self-employment consistent with the view that the more disadvan-

taged tend to become self-employed.2

Despite this evidence and other crucial determinants such as language, ethnic

origin, cultural/colonial connections, there has been little interest in offering a theo-

retical explanation for skilled immigrants’ over-representation in self-employment.

We attempt to cover this gap by developing a simple theoretical explanation of the

available evidence, a good share of which dictates that relatively more skilled immi-

grants (to natives) end up as self-employed. In the end, we also look into the prospect

* Beladi: Economics Department, College of Business, University of Texas at San Antonio, San Antonio,

TX 78249, USA.E-mail:hamid.beladi@utsa.edu. Kar: Centre for Studies in Social Sciences, Calcutta, India

and Institute for the Study of Labor, IZA, Bonn, Germany. Saibal Kar is indebted to Eliakim Katz and

seminar participants at the Indian Statistical Institute, Calcutta, and Santa Fe Institute, USA. The authors

duly thank an anonymous reviewer for excellent comments. The usual disclaimer applies.

Review of Development Economics, 19(3), 666–682, 2015

DOI:10.1111/rode.12155

© 2015 John Wiley & Sons Ltd

of how relatively unskilled immigrants perform in the host country labor market. By

modeling the occupational choice of unskilled immigrants we directly engage with the

issue of development of minority entrepreneurship in rich countries. This is expected

to have strong implications for immigrants’ economic assimilation with the natives, as

well.

The subject of self-employment among all native unskilled workers (and immi-

grants) is largely based on the subsidiary literature highlighting and reflecting on the

pattern of development among minority workers, per se. A national survey in the

USA (Roper Organization, 1987) reports that 61% of white-collar workers rated busi-

ness ownership as an excellent or good way to get ahead, as compared with 54% of

blue-collar workers. Forty-eight per cent of non-high-school graduates (the same for

blacks and whites) ranked self-employment higher than other professions, notably

wage work. Considering male high-school dropouts as the unskilled section of the

population, Balkin (1989) tabulated self-employment rate among this group across

industries. For all industries taken together [Current Population Survey (CPS), March

1987] the self-employment rate was 11.8%. Of this, agriculture, forestry and fishing

accounted for 44.4%; mining 7.2%; construction 16.9%; manufacturing 1.3%; whole-

sale trade 8.3%; retail trade 15.6%; services 16.8%; and finance, insurance and real

estate, 11%. Nevertheless, the self-employment rate for all male was considerably

greater (21% greater) than the self-employment rate of male dropouts. Even men

who finished high school had a greater participation (14%) in self-employment com-

pared with those who did not (11.8%). Bauman (1988) finds that the self-employment

rate for persons in poverty who worked full time is twice that of the self-employment

rate for the total full-time working population. However, if minorities are associated

with low-income groups (Blacks and Hispanics in the USA), then there is evidence of

less participation in self-employment.3Generous unemployment benefits may also be

responsible for low participation in self-employment among the unskilled. Low-

skilled immigrants, on the other hand, of which a considerable part may be undocu-

mented or illegal [see Winegarden and Khor (1993), for income inequality

comparison for native-born population in the USA] are not likely to be covered by

unemployment benefits or health insurance and would naturally have a high opportu-

nity cost of unemployment. Besides, wages offered to unskilled workers may still

exceed their pay-off if they have not migrated—considering that most unskilled immi-

grants originate in poor countries and could be even refugees or asylum-seekers (see

Enchantegui, 1998). Nevertheless, it is possible that the high unemployment rate

among the unskilled group, both natives and immigrants, pushes them into sup-

plementary sources of earnings such as self-employment. Overall, the evidence is

mixed and shows that controlling for similar characteristics, the self-employment rate

increases with schooling.

As a derivative of the problem of occupational choice, we show that the choice of

riskier self-employment by immigrant workers helps to promote income growth and

leads to the development of economic conditions of initially disadvantaged groups.

Both these involve measuring the ex post degree of risk aversion among immigrants

and natives. The workers according to our formulation are deemed as skilled and

unskilled types within a particular skill category. Essentially, this means that there are

both good/productive workers and bad/unproductive workers within each

professional/skill group, making the ex ante distinction costly for potential employers

in the rich country. The skill variability has previously been generalized over a contin-

uum of skill (as in Katz and Stark, 1987). In our model, the critical degree of risk aver-

sion for each group generates the distribution of individuals between employed and

IMMMIGRANTS AND ENTREPRENEURSHIP 667

© 2015 John Wiley & Sons Ltd