Ethnic Entrepreneurship and Assimilation

Abstract

We study the assimilation of ethnic minority individuals to the native labor market and the impact of integration policies on assimilation. In our model, ethnic individuals choose between 1. entrepreneurship, 2. assimilating to the native labor market, and 3. being employed by co-ethnic entrepreneurs. We find that when integration policies increase the returns of assimilation to the native labor market, there will be more ethnic entrepreneurs and more workers hired in the ethnic sector. This counter-intuitive result is due to wage adjustment in the ethnic sector. The equilibrium is inefficient and we propose a policy mix to restore efficiency.