January 14, 2015. Immigrants are entrepreneurial—that is by now well established. But how much more is not as widely understood.
As I was working on a report about immigrant business ownership, Bringing Vitality to Main Street, released today by the Americas Society/Council of the Americas with the Fiscal Policy Institute, I dug into what the research shows.
What I found is that there is broad consensus that immigrants are a little more likely to own businesses than their U.S.-born counterparts, but not a lot more likely. Specifically, immigrants are about 10-15 percent more likely to own businesses than their U.S.-born counterparts.
Our study finds that in 2013, immigrants made up 16.3 percent of the labor force in the United States, and 18.2 percent of business owners. That 1.9 percentage point difference that means immigrants are 12 percent more likely to be business owners than their U.S.-born counterparts.
Robert W. Fairlie, a pioneer in this field, uses a different methodology but comes to the same conclusion. In a 2012 report commissioned by the Small Business Administration, Fairlie calculates the numbers a little differently, and finds that 10.5 percent of the immigrant labor force owns a business, compared with 9.3 percent of the U.S.-born labor force. That 2.2 percentage point gap represents a difference of 13 percent.
But, maybe you’ve heard immigrants are much more entrepreneurial than other people—maybe even twice as likely to be entrepreneurs as the U.S.-born labor force?
The confusion may come from what seems like a subtle nuance: the difference between “business starts” and “business ownership.”
Fairlie’s work has stressed the role of immigrants in starting businesses. Churn in the economy, he reasonably argues, is important to consider. And, his methodology shows that immigrants are substantially more likely to start a business, even if they may also be more likely to close that business. In a 2008 study, also commissioned by the Small Business Administration, Fairlie found that immigrants are “nearly 30 percent more likely to start a business than nonimmigrants.” In a more recent data, commissioned by the Partnership for a New American Economy, Fairlie uses post-recession data to find that “immigrants are now more than twice as likely to start a business as their U.S.-born counterparts.”
If immigrants are a lot more likely to start a business but just a little more likely to be a business owner, that must mean more immigrant-owned businesses close as well. Fairlie acknowledges this, though others reading his work have sometimes missed this point.
The idea that there is more churn in immigrant-owned businesses is intriguing, and it certainly seems plausible. Immigrants may have a harder time getting bank loans, or navigating the necessary licensing processes, for example. And, not all business closings are a bad thing. An immigrant who hangs up a shingle as an accountant but then gets offered a job by an established accounting firm, for example, might happily make the move.
But, while my curiosity is piqued by the finding, I’m not completely convinced yet. Here’s why: Fairlie’s work uses self-employment as a proxy for business ownership. Everyone who is self-employed is counted as a business owner, and everyone who moves from being not self-employed in one month to being self-employed in the next month is counted as starting a business.
That strikes me as problematic. Day laborers and most domestic workers, for example, are self-employed. They don’t have a single regular employer…but that doesn’t mean they should be considered business owners.
Many people who do have a regular employer are also may be “misclassified workers,” that is, their employers pay them as independent contractors to avoid responsibility for taxes or benefits. This is illegal, but a common enough practice that there are Misclassification Task Forces in New York, Tennessee, Iowa, and New Hampshire, to name a few.
Finally, we’ve just been through a very steep recession, when millions lost their jobs. Some of the newly self-employed may be people who got creative and started a new business, a real and important source of future growth. But, how many of the newly self-employed are really people who are piecing together what work they can get while they hope for something more permanent?
There is a readily available alternative to using self-employment as a proxy for business ownership. The Census Bureau—in the decennial Census, the American Community Survey, and the Current Population Survey—asks some further questions of people who are self-employed. Do you own your own incorporated business? Is running that business your full-time job?
Several factors make it seem preferable to count only people with incorporated businesses as business owners. It is telling, for instance, that people who are self-employed and have an incorporated business typically have a higher income than workers overall, while people who are self-employed but do not have an incorporated business typically have lower wages. And, while immigrants are somewhat less likely than U.S.-born workers to have a construction business that is incorporated, they are considerably more likely to be in the construction industry and self-employed but not incorporated. This fits with the notion that unincorporated self-employed in construction may be day laborers or misclassified workers than business owners. It also fits with the findings of Giovanni Peri and Chad Sparber that when immigrants first enter the labor force they move primarily into jobs requiring manual skills while U.S.-born workers move to positions requiring communication skills.
At the Fiscal Policy Institute, and in our joint research with the Americas Society/Council of the Americas, we have defined business ownership as people whose full-time job is to run an incorporated business, and we think it continues to lead to very credible findings.
What we discover in our new report is that immigrants are genuinely playing an outsized role in the area of Main Street businesses—the grocery stores, restaurants, retail shops, and beauty salons that help give a neighborhood its character and play an important role in urban revitalization. Measuring all Main Street businesses (retail, accommodations and food services, and a handful of “other services” such as nail salons and dry cleaners), we find that immigrants make up 28 percent of all Main Street business owners in the United States. That’s a stunningly high share.
To make that finding meaningful, it’s important to understand that in general immigrants are a little, not a lot, more likely to be business owners.
What about the question of churn? It seems to me that the question deserves further exploration. Maybe the same type of analysis Fairlie has done could be done using data about people who have an incorporated business and whose main job is to run that business? On the other hand, there are some advantages to including people who are self-employed but do not have an incorporated business in the picture when looking at business starts in particular. After all, many businesses start informally, and make a gradual transition to incorporation. Perhaps future analysis might look for ways to filter out people who are working on their own and not in any real sense starting a business?
Meantime, it is much more widely agreed upon than is generally understood that immigrants are a little, but not a lot, more likely to be business owners. But, as our new report shows, immigrants are truly playing an outsized role as owners of Main Street businesses.
David Dyssegaard Kallick