Why More Self-Employed are Immigrants Than Two Decades Ago

Why More Self-Employed are Immigrants Than Two Decades Ago

Why are so many more of America’s self-employed immigrants than was the case a generation ago? Dan Wilmoth, an economist at the Office of Advocacy of the U.S. Small Business Administration reports that the biggest reason is the rise in immigration.

Between 1994 and 2015, the immigrant fraction of the unincorporated self-employed rose from 8.6 percent to 19.5 percent, Wilmoth explains. Three separate factors account for that increase. First, and foremost, the number of foreign born Americans rose over the 21 year period. In 1994, 10.6 percent of Americans were born elsewhere. In 2015, 17.3 percent of the population were immigrants.

Second, the immigrant population today is more likely to engage in unincorporated self-employment than in 1994. While the shift is not huge, the fraction of the foreign born population that runs his or her own unincorporated business rose from 5.9 percent in 1994 to 6.5 percent in 2015.

Third, a smaller fraction of the U.S. population engages in self-employment now than in 1994. Back in 1994, 7.2 percent of Americans were (unincorporated) self-employed. By 2015 that share had slipped to 5.8 percent.

While all three of these factors contributed to the rise in the immigrant fraction of unincorporated self-employment, they did not have an equal effect. Nearly two-thirds (64 percent) of the increase in the immigrant fraction of America’s self-employed is accounted for by the increase in the American population that was born overseas. About a quarter (24 percent) of the increase comes from the decline in the fraction of Americans who work for themselves. The smallest fraction (12 percent) of the increase is the result of an increase in the tendency of immigrants to be self-employed.

The relative contribution of these factors should affect how we understand why so many more of the people running their own unincorporated businesses were born outside of the country in 2015 than in 1994. There’s a tendency of many observers to attribute this trend to a rising entrepreneurship gap between immigrants and the native born. That’s misleading on two counts.

To begin with, these data are about unincorporated self-employment. While some unincorporated self-employed are entrepreneurs as many people view the term, there is far from a one-to-one correspondence between unincorporated self-employment and entrepreneurship. Many unincorporated self-employed are independent contractors not business owners. Moreover, even the ones that are business owners are not the kind of business owners most Americans think of when they think of entrepreneurs. Nearly nine-tenths of the unincorporated self-employed have no employees.

Even more important is relative sizes of the effects of a rising immigrant population and the rising tendency of immigrants to be self-employed. Growth in immigration has a more than five times greater effect on the fraction of the self-employed who were born elsewhere than the increased tendency of immigrants to be self-employed.

While it is not wrong to say that a rise in the “entrepreneurial” tendency of immigrants is partially responsible for the rising fraction of America’s self-employed who are born abroad, that’s neither the most parsimonious nor the most precise explanation for what has happened over the past two-plus decades. The simplest, twitter-length answer is: More Americans were born abroad.

Statue of Liberty Photo via Shutterstock

Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.