What influences entrepreneurship among skilled immigrants in the USA? Evidence from micro-data.

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Date: July 2021
From: Business Economics(Vol. 56, Issue 3)
Publisher: Springer
Document Type: Article
Length: 5,657 words
Lexile Measure: 1620L

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Abstract

Self-employment among immigrants is a key source for income and social assimilation with natives. Rate of self-employment is significantly higher for immigrants than for native-born individuals, and the causal reasons behind this differential are still not well understood. We hypothesize that a key factor is that domestic employers often cannot accurately assess the quality of higher education received by the immigrants in their home countries. This lowers immigrants' return to human capital in the traditional job market relative to natives. Our hypothesis predicts that this factor should be reflected in higher relative rates of self-employment for immigrants that rises with the level of education. We test and confirm this hypothesis using IPUMS micro-data from the USA.

Keywords Immigrants * Self-employment * Human capital * Entrepreneurship

JEL Classification F22 L26 N12

1 Introduction

Immigration continues to be a politically and economically challenging issue. (1) One of the persistent observations in large migrant-receiving developed countries is that the rates of self-employment, business ownership, and entrepreneurship are significantly higher among immigrants than native-born individuals, and this effect is equally prevalent in the USA, United Kingdom, Canada, Sweden, and Australia (Borjas 1986, 2000; Lofstrom 2017; Clark and Drinkwater 2000; Fairlie et al. 2012; Fairlie (1996, 2002); Blanchflower 2000; Ohlsson et al. 2010). While some of this may be due to 'pull' effects, such as immigrants placing higher value on independence or being more willing to take on risk, much is likely to have been caused by 'push' factors, due to the barriers immigrants face in finding wage employment, including, but not limited to, language barriers, lack of social networks, or discrimination. (2) While the literature regularly reports higher rates of self-employment for immigrants, the most convincing reasons behind this differential are still elusive.

Another stylized fact from the literature is that there are persistent pay and job disparities between immigrant and native-born workers in traditional wage employment. For the USA, estimates of the income gap range from 17 to 20% (Borjas 1994; Card 2005). (3) For Canada, Reitz et al. (2014) report that under-utilization of immigrants' skills results in a loss of $ 11.37 billion to the Canadian economy. One reasons for the gaps in wage employment that has received attention in the theoretical literature is the asymmetric information problem between domestic employers and immigrants regarding the quality of the human capital attained by immigrants in their home countries (Katz and Stark 1984; Chau and Stark 1999; Barrett et al. 2012; Beladi and Kar 2015; etc.).

When domestic employers have difficulty in differentiating between high-quality and low-quality foreign educational credentials or human capital, the equilibrium wage offer (based on the expected or average quality) will lie below the true value of high-quality human capital, but above the true value of low-quality human capital. This wage olfer will make employment highly attractive for those with lower quality human capital, but unattractive for those with higher quality human capital, leading to lower quality human capital types dominating the pool of applicants. (4) Worsening the situation, immigrants...

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Gale Document Number: GALE|A673455235