The State of Minority- and Women- Owned ... - Cleveland.com

Market-Based Disparities in Business Formation and Business Owner Earnings
less water in bath A than there is in bath B. A lower exit rate for nonminority-owned firms than
is found for minority-owned firms is perfectly consistent with the observed fact that minorityowned
firms are younger and smaller than nonminority-owned firms. The extent to which that
will be true is a function of the relative sizes of the inflow and the outflow rates.
B. Race and Gender Disparities in Earnings
In this section, we examine earnings to determine whether minority and female entrepreneurs
earn less from their businesses than do their nonminority male counterparts. Other things equal,
if minority and female business owners as a group cannot achieve comparable earnings from
their businesses as similarly-situated nonminorities because of discrimination, then failure rates
for M/WBEs will be higher and M/WBE formation rates will be lower than would be observed in
a race- and gender-neutral market area. Both phenomena would contribute directly to lower
levels of minority and female business ownership.
Below, we first examine earnings disparities among wage and salary employees, that is, nonbusiness
owners. It is helpful to examine this segment of the labor force since a key source of
new entrepreneurs in any given industry is the pool of experienced wage and salary workers in
similar or related industries (Blanchflower 2000 and 2004). Employment discrimination that
adversely impacts the ability of minorities or women to succeed in the labor force directly
shrinks the available pool of potential M/WBEs. In almost every instance examined, a
statistically significant adverse impact on wage and salary earnings is observed—in both the
economy at large and also in the construction and construction-related professional services
sector. 234
We then turn to an examination of differences in earnings among the self-employed, that is,
among business owners. Here too, among the pool of minorities and women who have formed
businesses despite discrimination in both employment opportunities and business opportunities,
statistically significant adverse impacts are observed in the vast majority of cases in construction
and construction-related professional services (hereafter, “construction”), and other sectors of the
economy.
In the remainder of this Chapter, we discuss the methods and data we employed and present the
specific findings.
1. Methods
We used the statistical technique of linear regression analysis to estimate the effect of each of a
set of observable characteristics, such as education and age, on an outcome variable of interest.
In this case, the outcome variable of interest is earnings and we used regression to compare
234 There is a growing body of evidence that discriminatory constraints in the capital market prevent minorityowned
businesses from obtaining business loans. Furthermore, even when they are able to obtain them, there is
evidence that these loans are not obtained on equal terms: minority-owned firms have to pay higher interest
rates, other things being equal. This is another form of discrimination with an obvious and direct impact on the
ability of racial minorities to form businesses and to expand or grow previously formed businesses. See Chapter
VI, infra.
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