April 2, 1999
Contact: Jennifer McNulty (831) 459-2495

UCSC economist examines rates of business ownership among African Americans

FOR IMMEDIATE RELEASE

SANTA CRUZ, CA--African American men are only one-third as likely to own their own businesses as are white men, according to an analysis by an economist at the University of California, Santa Cruz.

The discrepancy is due to the fact that black men are only half as likely to start up their own businesses as white men and are twice as likely to fail if they do, said Robert Fairlie, an assistant professor of economics at UCSC who specializes in issues of minority employment.

Fairlie's findings appear in an article entitled "The Absence of the African-American Owned Business: An Analysis of the Dynamics of Self- Employment" in the current issue of The Journal of Labor Economics (January 1999).

His work is striking, particularly in light of growing tensions between Koreans and African Americans in cities such as Los Angeles and New York. The relative success of Koreans and the failure of blacks to establish and maintain businesses has contributed to racial tensions, and many policy makers see business ownership as a way out of poverty for disadvantaged groups. Fairlie's work has implications for policy makers who are eager to bolster rates of self-employment.

In seeking to explain the low rates at which black men become self- employed, Fairlie considered differences between blacks and whites in four areas that affect self-employment rates overall: education, asset levels, parental financial resources, and parental self-employment.

Although the percentage of blacks who graduate from college is roughly one-third the percentage of whites, Fairlie found that low levels of education among blacks do not contribute substantially to their low rate of entry into self-employment. Rather, low levels of assets and a low likelihood of having self-employed fathers are more important factors that inhibit blacks from becoming self-employed. Black asset levels are slightly less than 25 percent of white asset levels, and blacks are one-sixth as likely as whites to have had a self-employed father when they were growing up, said Fairlie.

The policy implications of Fairlie's work are mixed. On the entry end of self-employment, he found that bolstering programs that help potential minority business owners acquire start-up capital would have only a minimal impact. Even quadrupling current levels of black assets would narrow the racial gap of those who choose to become self- employed by only 15 percent.

Fairlie is confident that his findings indicate, however, that higher rates of self-employment among the current generation of blacks will result in increases in self-employment among future generations of African Americans.

At the other end of the self-employment experience, Fairlie found little to explain the high rates of failure among self-employed black men. Low levels of education and assets, and a low probability of having had a self-employed father, do not explain why blacks are more likely to go back to wage or salary work, he said. Fairlie intends to look more closely at the role of parental self-employment on success rates among the self- employed. Specifically, he plans to look at the success rates of those who worked in their father's businesses and those who inherited an established business from their father.

Fairlie's findings are based on an analysis of data from the Panel Study of Income Dynamics (PSID), a study of about 40,000 people who were surveyed from 1968 to 1989 by researchers at the University of Michigan. In a sample that is representative of the U.S. population, Fairlie found that the self-employment rate among African American men is 4.61 percent, compared to 15.23 percent among white men. Only 2.02 percent of black men become self-employed during any given year, compared to 3.95 percent of white men. And the rate out of self- employment is 36.64 percent for black men, compared to 18.51 percent for whites.

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To reach Robert Fairlie: Office: (831) 459-3332 E-mail: rfairlie@cats.ucsc.edu

A copy of the study, "The Absence of the African-American Owned Business: An Analysis of the Dynamics of Self-Employment," is available in PDF format and can be downloaded from the following Web site:

econ.ucsc.edu/~fairlie/papers/dynam6.pdf

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