This article identifies the factors that influence the self- employment decision for U.S. immigrants, including human capital, years in the U.S., geographic concentration, and labor market characteristics.Self-employed ; Immigrants

Maude Toussaint-Comeau

English

Research Papers in Economics

Chicago Fed Letter
Self-employed immigrants: An analysis of recent data
by Maude Toussaint-Comeau, economist
This article identifies the factors that influence the self-employment decision
for U.S. immigrants, including human capital, years in the U.S., geographic
concentration, and labor market characteristics.
ESSAYS ON ISSUES THE FEDERAL RESERVE BANK APRIL 2005
OF CHICAGO NUMBER 213
Self-employment has traditionally rep-
resented and continues to be an impor-
tant route for immigrants to enter the
American economic mainstream and
improve their socioeconomic standing.
In many metropolitan areas, immigrant-
owned small businesses have fueled the
growth in the minority small business
sector, and have become an integral as-
pect of urban revitalization and commu-
nity development. This Chicago Fed Letter
discusses the factors that influence the
self-employment decision and presents
an analysis of immigrant self-employment,
based on the most recent Census data
for 2000.
Factors influencing self-employment
Previous research has identified a num-
ber of factors to explain variations in
the propensity of different immigrant
groups to be self-employed. Human
capital and personal characteristics,
including education, knowledge of the
host country’s language, and the length
of time in the country influence the
decision by immigrants to become self-
employed. Self-employed immigrants
also tend to be married, to have greater
financial resources, and to be in pro-
fessional and managerial occupations.
Other factors that affect the decision
include disposition toward risk-taking
and intergenerational resources. In
addition, immigrants from countries
with higher self-employment rates are
more likely to enter self-employment
in the U.S. Self-employed immigrants
also tend to have greater access to social
or ethnic networks.1
The business owner’s human capital has
been shown to influence the viability
and longevity of the business.2 The ed-
ucational attainment of entrepreneurs
potentially helps facilitate financing op-
portunities, because it forms part of a
lender’s evaluation.3 However, empirical
evidence suggests that immigrants with
a college degree are less likely to be self-
employed than those with a high school
diploma.4 This may be because those
with higher degrees have better oppor-
tunities in the job market and, there-
fore, face higher opportunity costs in
becoming self-employed.
English language proficiency allows
the immigrant to organize and oper-
ate his/her business, communicate
with customers and suppliers who
may not belong to the same ethnic
group, and adhere to legally mandat-
ed practices. A lack of proficiency in
English may limit immigrants’ access
to formal financial markets and to in-
formation important in setting up a
business, such as small business lend-
ing programs. Related to the ability
to speak the language is the length of
time an immigrant has resided in the
U.S. The longer an immigrant resides
in the U.S., the more likely he/she is
to be financially assimilated into the
new society, which might coincide
with a greater willingness or ability to
be self-employed. For example, Borjas
(1986) finds that the greatest propen-
sity for self-employment among immi-
grants, relative to natives, occurs five
years to ten years after immigration.5
In many metropolitan areas,
immigrant-owned small
businesses have fueled the
growth in the minority small
business sector.Borjas also finds evidence of an enclave
effect, where members of the same eth-
nic group live in proximity, for promot-
ing self-employment opportunities for
immigrants. Here, the common language
and culture play an important role in
the creation of enclave businesses. Eth-
nic economies and/or ethnic enclaves
potentially provide an opportunity for
greater business networks, offer a pro-
tected market for ethnic goods production,
and provide experience and apprentice-
ship from a co-ethnic employer.6 Within
these ethnic economies, ethnic institu-
tions would promote personal contacts,
informal arrangements to build finan-
cial resources and, potentially, play a role
in mobilizing information and monetary
resources for small ethnic businesses.
These (often informal) financial resourc-
es can be critical for an immigrant busi-
ness, especially during the formation
stage of the business.
In addition, location characteristics such
as the size of the population in a metro-
politan area and the ratio of self-employ-
ment earnings to wage earnings (a proxy
for the relative success of the self-em-
ployed in the metropolitan area) are
likely to increase the probability of self-
employment among immigrants. Also,
the higher the unemployment rate in
a metropolitan area, the greater the
likelihood of self-employment.7
The 2000 Census data
Figure 1, panel A shows self-employment
rates from 1980 to 2000 for the U.S.-
born, all immigrants, and different
groups of immigrants.8 On average,
immigrants have higher self-employment
rates than natives.9 Differences exist in
the self-employment rates of different
groups. The self-employment rates of
Mexicans, Puerto Ricans, Caribbean
immigrants, and South East Asian immi-
grants remain lower than the self-em-
ployment rate for immigrants overall.
Between 1990 and 2000, the self-em-
ployment rate of immigrants decreased
slightly. This reflects decreases in the
employment rates of Northeast Asian
and Middle Eastern immigrants, two
groups with very high rates of self-em-
ployment over the period. In 2000, the
self-employment rates of Mexican, Latin
American, Caribbean, and Southeast
Asian immigrants showed sizable in-
creases over their 1990 levels. The in-
crease in self-employment among
Mexican and Latin American immi-
grants coincided with a general increase
in the overall Hispanic immigrant
population over the 1980s and 1990s.
Figure 1, panel B reports the self-employ-
ment rates of immigrants in primary
and non-primary metropolitan statistical
areas (MSAs).10 In general, there is a
tendency for immigrants to have higher
self-employment rates in primary met-
ropolitan areas. This is consistent for
Cuban, Mexican, Latin American, North-
east Asian, and Middle Eastern immi-
grants. There is little difference in the
self-employment rates by location for
African, European, and Indian/Pakistani
immigrants, suggesting that ethnic en-
claves may be less important in the self-
employment decision for these groups.
What types of businesses are self-em-
ployed immigrants engaged in? Ac-
cording to the Census data, the most
common businesses for self-employed
Mexican immigrants are construction,
private household care, landscaping
services, child day care services, and
restaurants. Caribbean immigrants are
engaged in construction businesses, child
day care services, taxi and limousine
services, private household cleaning,
and automotive repair and maintenance.
Cuban immigrants tend to be in con-
struction, truck transportation, automo-
tive repair and maintenance, real estate,
and professional physician office services.
North East Asians tend to be in restau-
rants and other food services, construc-
tion, real estate, wholesale trade, and
dry cleaning and laundry services. South-
east Asians tend to be in restaurants, nail
salons, beauty salons and other person-
al care, construction, professional physi-
cian services, and grocery stores. Self-
employed Indian/Pakistani immigrants
tend to be in physician services, grocery
stores, hotels/motels, taxi and limou-
sine services, restaurants and other food
services, computer systems design, and
gasoline stations.
Figure 2 shows the socioeconomic char-
acteristics of the self-employed. On aver-
age, the U.S.-born have more education
than immigrants. The aggregated edu-
cational distribution for all immigrants
hides important variations by different
country/region of origin. Close to 60%
of self-employed Mexicans have less
than a high school level of education.
By contrast, over 60% of self-employed
1.  Self-employment rates in the United States
U.S. All Puerto Latin N.E. S.E. Middle India &
Year -born immigrant Cuba Mexico Rico America Caribbean Africa Europe Asia Asia East Pakistan
2000 8.2 9.3 12.5 6.8 4.7 9.2 6.2 8.4 12.5 10.7 7.0 16.0 10.2
1990 7.8 9.5 12.6 5.6 4.4 7.7 5.7 9.9 12.3 14.6 6.0 18.3 10.1
1980 6.8 7.9 9.5 3.5 3.2 5.4 3.1 7.5 10.4 11.1 4.1 15.7 7.9
All Puerto Latin N.E. S.E. Middle India &
 immigrant Cuba Mexico Rico America Caribbean Africa Europe Asia Asia East Pakistan
Primary MSAs 10.2 12.9 8.4 4.6 10.4 6.2 7.7 12.8 11.1 6.4 21.3 8.7
Non-primary MSAs 8.9 10.8 5.6 4.9 8.3 6.1 8.8 12.4 10.3 7.3 16.7 10.8
NOTE: The population is defined as 18–64 year olds, living in metropolitan areas, in the labor force, not in the military, and having positive earnings.
SOURCES: Public Use Micro Statistics (PUMS) (1980, 1990, 2000).
B.  Immigrants in primary and non-primary metropolitan areas (MSAs) in 2000
A.  U.S.-born and immigrants by country/region of originMichael H. Moskow, President; Charles L. Evans,
Senior Vice President and Director of Research;  Douglas
Evanoff, Vice President, financial studies; David
Marshall, Vice President, macroeconomic policy research;
Richard Porter, Senior Policy Advisor, payment
studies; Daniel Sullivan, Vice President, microeconomic
policy research;  William Testa, Vice President, regional
programs and Economics Editor; Helen O’D. Koshy,
Editor; Kathryn Moran, Associate Editor.
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Bank of Chicago. The views expressed are the
authors’ and are not necessarily those of the
Federal Reserve Bank of Chicago or the Federal
Reserve System.
© 2005 Federal Reserve Bank of Chicago
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ISSN 0895-0164
Indian/Pakistani immigrants have some
college level education. There are al-
most twice as many African, Northeast
Asian, Southeast Asian, and Middle
Eastern self-employed immigrants with
a college education as there are Puerto
Rican, Latin American, and Caribbean
immigrants. Consistent with differenc-
es in educational attainment, a much
larger proportion of Mexican and Latin
American self-employed immigrants are
not proficient in English. The differences
in educational attainment and language
proficiency are likely to influence the
types of businesses (e.g., whether pro-
fessional services or not) that these dif-
ferent groups enter. Interestingly, despite
the higher educational levels of self-em-
ployed Asians, a sizable proportion still
lack proficiency in English. This suggests
that many Asians may operate their busi-
nesses in ethnic enclaves or ethnic econ-
omies, where English is less important.
Figure 2 also shows that the self-employ-
ment income of the U.S.-born is higher,
on average, than that of immigrants. The
self-employment incomes of European,
Asian, and Middle Eastern self-employed
immigrants are higher than those of Latin
American, Mexican, Cuban, and Carib-
bean self-employed immigrants. Again,
these differences may be indicative of
2.  Socioeconomic characteristics of the self-employed (percent, unless stated otherwise)
U.S. All Puerto Latin N.E. S.E. Middle India &
-born immigrant Cuba Mexico Rico America Caribbean Africa Europe Asia Asia East Pakistan
Education
Less than HS 6.5 24.1 20.2 59.1 26.4 29.3 22.8 7.0 11.1 11.4 17.2 8.3 7.8
HS diploma 23.5 20.1 22.0 16.1 27.6 23.3 26.3 15.6 23.3 17.5 16.8 16.7 11.1
College or 36.2 28.4 23.5 5.7 18.1 18.1 16.0 46.3 34.6 46.3 31.8 45.8 62.1
more
English proficiency
Well/very well 99.6 76.8 70.0 55.8 84.7 69.5 81.5 95.7 94.6 73.6 80.3 95.1 94.2
Not well or
not at all 0.4 23.2 30.0 44.2 15.3 30.5 18.5 4.3 5.4 26.4 19.7 4.9 5.8
Year of entry
1995–2000 11.1 10.6 13.8 9.6 15.0 9.5 17.1 8.4 7.2 6.9 6.1 10.1
1990–94 14.5 9.9 15.1 12.1 15.7 17.1 16.1 10.2 12.9 15.2 10.8 15.8
1980–89 34.5 24.3 35.4 22.6 40.2 39.1 36.9 19.0 37.9 40.7 33.3 38.9
1970–79 23.6 14.1 24.2 18.9 16.9 22.5 21.5 17.6 24.8 28.0 34.5 27.1
Pre-1970 16.3 39.8 10.4 36.9 9.7 11.1 4.5 33.9 11.0 7.0 12.6 7.3
Self-employment
income ($) 26,324 21,162 18,631 16,348 17,273 16,533 16,212 20,941 24,831 22,786 21,761 29,934 31,077
Total
income ($) 58,843 44,409 49,032 26,640 36,560 31,876 31,525 48,420 60,038 52,134 43,444 71,106 77,922
Hours/week
worked 42.7 43.3 43.8 40.6 41.2 40.3 41.8 45.6 43.9 45.0 43.9 47.3 47.8
NOTE: See figure 1.
SOURCE: PUMS (2000).
the size or type of business held by the
different groups.
The longer immigrants have been in the
U.S., the greater the tendency to be self-
employed. For example, 24% of Cubans
who came in the U.S. in the 1980s are
self-employed, compared with 11% of
those who came between 1995 and
2000 (figure 2).
Conclusion
This Chicago Fed Letter discusses the de-
terminants of self-employment for im-
migrants. The results from this analysis
show that, on average, the self-employ-
ment rate of immigrants is somewhat
higher than that of native born. However,
self-employment rates of immigrants
differ widely by country or region of
origin. Differences in personal and hu-
man capital characteristics and length of
time residing in the country are potential
sources of differences in self-employment
rates among the different groups. For in-
stance, on average, groups with the high-
est self-employment rates have completed
more years of schooling and  have resided
in the U.S. for a longer period of time.
This suggests that, in part, the ability to
go into business may be the result of an as-
similation or information accumulation
process. If so, policy initiatives that
promote entrepreneurial training and
provide assistance with business develop-
ment plans, language training, and fi-
nancial literacy are worth considering
in addressing the business development
needs of some immigrant groups.1 I. Light, 1972, Ethnic Enterprise in America.
Berkeley, CA: University of California Press;
R. Raijman, 2001, “Determinants of entre-
preneurial intentions: Mexican immigrants
in Chicago,” The Journal of Socio-Economics,
Vol. 30, No. 5, pp. 393–411; and A. M.
Yuengert, 1995, “Testing hypotheses of
immigrant self-employment differences
and possible explanations,” Journal of Human
Resources, Vol. 30, No. 1, pp. 194–204.
2 T. Bates, 1990, “Entrepreneur human capital
inputs and small business longevity,” The
Review of Economics and Statistics, Vol. 72,
No. 4, pp. 551–559.
3 R. Cressy, 1996, “Are business startups debt-
rationed?,” The Economic Journal, Vol. 106,
No. 438, pp. 1253–1270.
4 M. Toussaint-Comeau, 2005, “How enclaves
matter in immigrant self-employment deci-
sions,” Federal Reserve Bank of Chicago,
manuscript.
5 G. Borjas, 1986, “The self-employment
experience of immigrants,” National
Bureau of Economic Research, working
paper, No. 1942.
6 Bonachich and Modell (1980) first intro-
duced the term “ethnic economy” as a
situation where an immigrant or ethnic
minority group maintains an economic
sector, produces distinct (often ethnic)
goods in which they have market power,
and members of the group have owner-
ship stakes and hire co-ethnic employees.
An “ethnic enclave,” a term coined by
Wilson and Portes (1980), is an ethnic
economy that represents a geographic
clustering of these activities. See E. Bonachich
and J. Modell, 1980, The Economic Basis
of Ethnic Solidarity in the Japanese American
Community, Berkeley, CA: University of
California Press; and K. Wilson and
A. Portes, 1980, “Immigrant enclaves:
An analysis of the labor market experiences
of Cubans in Miami,” American Journal of
Sociology, Vol. 86, pp. 295–319.
7 M. Lofstrom, 2004, “Labor market assimi-
lation and the self-employment decision of
immigrant entrepreneurs,” University of
California at Irvine, working paper; and
Toussaint-Comeau (2005).
8 The groupings follow Lofstrom (2004).
9 Regression analyses show that holding
different socioeconomic characteristics
and human capital constant, there are no
statistically significant differences in the
likelihood of immigrants to be self-employed
relative to natives for the 2000 Census data,
contrary to previous findings using earlier
Census data.
10Primary locations are MSAs at the 90th per-
centile of the ethnic concentration index
for a group; non-primary locations are below
the 90th percentile.

Self-employed immigrants: an analysis of recent data

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Self-employed immigrants: an analysis of recent data

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