Entrepreneurship as a Bridge to Employment? Evidence from Formerly Incarcerated Individuals

Abstract

While entrepreneurship is increasingly seen as a career choice to move ahead, many entrepreneurs eventually transition back to wage-employment. This leads to an important question of whether entrepreneurship is, in fact, a desirable labor market choice in the long term, considering the impact it has on subsequent wage-employment outcomes. This paper explores this question by focusing on a population that is frequently pushed into entrepreneurship due to pervasive labor market discrimination in the United States: formerly incarcerated individuals. I argue that entrepreneurship will benefit, rather than harm, formerly incarcerated entrepreneurs in subsequent wage-employment outcomes, because the severe discrimination they face in the traditional wage-employment market mitigates concerns for fit and commitment to wage-employment and, instead, amplifies the positive signal from entrepreneurial experience. Results from the National Longitudinal Study of Youth 97 data suggest that, compared to formerly incarcerated individuals without any entrepreneurial experience, those with entrepreneurial experience have an increased likelihood of securing wage-employment, regardless of actual entrepreneurial success. Interestingly, this is particularly true when they are high school dropouts or racial minorities (Black and Hispanic Americans), suggesting that entrepreneurship provides long-term benefits to those who are especially lacking in other positive credentials and, thus, are the most stigmatized by employers. I provide mechanism checks that take advantage of an exogenous policy shock and conduct in-depth interviews with employers and formerly incarcerated individuals.